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Why is Hewlett-Packard a Suitable Choice for Your Portfolio?

June 19, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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In one of my earlier articles, I mentioned how Hewlett-Packard has executed flawlessly on the turnaround plan laid down by CEO Meg Whitman. The shares of Hewlett-Packard (HPQ) have risen approximately 34% over last one year and has approximately tripled from the lows of late 2012. Recently, Goldman Sachs upgraded the rating for the stock from “sell” to “neutral” after re-considering their bearish attitude on the stock. It is clear that analysts and investors alike are optimistic about the stock movement as evidenced by absence of volatility in the share price even after the company missed Street expectations on its Q2 earnings report.

For the second quarter of 2014, HP’s non-GAAP diluted net earnings per share came in at $0.88, up 1% from the prior-year period, versus the previously provided outlook of $0.85 to $0.89 per share. Second quarter GAAP diluted net earnings per share stood at $0.66, up 20% from the prior-year period. The net revenues slid a percent on a year-over-year basis to $27.3 billion whereas the investors and analysts were expecting a revenue to the tune of $27.41 billion. The cash flow from operations stood at $3 billion and the company returned colossal amounts to shareholders via dividends and share repurchases i.e approximately $1.1 billion.

Printing: The cornerstone of success

As reported in the earnings call, the printing business of the company once again outperformed the market and saw reasonable growth in the number of shipments. The absolute printing revenue was $5.8 billion, down 4% year-over-year, driven by a decline in supplies revenues, primarily related to lower toner sales.

HP has been consistent with its innovation strategies in the printing segment as a result of which the printing business has seen strong results. For instance, this latest press release from the company showcases the immense potential of PageWide technology for large-format printing, delivering high-quality prints at faster speeds and lower costs. It is anticipated that this particular technology innovation will prove to be a disruptor in the $1.3 billion production printing market. The keen efforts of company in ensuring efficient innovation has kept this division buoyant in recent times.

In the second quarter the performance of the company’s printing segment was helped by better churn in the demand for Ink advantage printers and better traction for initiatives including Ink in the office. The company is poised to enter the 3D printing markets in late 2014 and this could prove to be a turning point in company’s comeback efforts as HP already enjoys a strong distribution network.

Though the prospects of 3D printing industry are not quite certain yet HP’s foray into this sector could bring healthy gains. However, stalwarts like Stratasys (SSYS) and 3D systems (DDD) might not have much to worry about as the company plans to enter the business 3D printing area and stay away from consumer 3D printing for now.

The gain in Personal Systems unit is a good news

The slowdown in demand for commercial PCs continued in the quarter but the company was still able to extract gains from sale of commercial PCs essentially because of the migration of users from Windows XP OS. As a result of the migration and credible selling, HP was able to achieve a growth of around 7% in the personal systems unit.

Besides a growth in commercial desktops, HP also did reasonably well in the notebooks segment. Recently, the company unveiled its new age laptop SlateBook that runs on Android in order to pull in the technology driven “millenials”. While the response to this latest innovation by the company is still ambiguous but the takeaway is clear: HP is eyeing considerable growth in sales of notebooks in order to compensate for the contracting demand in its desktops business. Though consumer sales in notebooks was down by 2% but consumer notebook revenue grew slightly for the first time since the fiscal 2010 third quarter.

Besides the growth in notebooks section, HP is also investing credible efforts in its smart devices products. The company recently added HP Slate 7 Plus, a business tablet that can be bought from HP’s US website for just $150. This is a laudable addition to its existing smart devices portfolio consisting of HP Slate 6 and Slate 7 tablet devices, which were released in India a few months back..

Takeaway

HP has demonstrated its ability to manage costs in a strategic manner without compromising the performance of the company in any which way. It has shed off approximately 33000 employees since Meg Whitman took charge in 2011. As a consequence of the cost management initiatives, HP has been able to build a viable cash position for itself over the last few quarters.

HP managed to generate $3 billion in cash from operations in the quarter and also paid a dividend $0.16 per share, which translates to a total cash usage of $0.31 billion. Mathematically, it implies that HP consumed just 10% of its cash in order to give valuable returns to shareholders in form of dividends.

Since the beginning of the year, HP's stock has gained 20.4% essentially because the investors are optimistic of healthy implementation of decided strategies. Besides that, it has been quite a value creator, a factor that highly appeals to dividend oriented shareholders. To sum it up, HP might have had a slightly bad second quarter but that definitely does not interpret much about the robust fundamentals of the company.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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