In most of my previous articles, I have already written much about the recovery in PC demand. This stabilization in PC demand has ushered in the good times for certain companies and one of these is the strong turnaround stories called Hewlett-Packard (HPQ). Yes, the word turnaround has become synonymous with the name of the company because it has exemplified the term with its consistent performance and strong outlook. So, let us see if HP is a worthwhile investment candidate after a reasonable third quarter and considering the improving scenario in printing and PC markets.
Since the beginning of the year, HP has gained approximately 157% on the stock exchange on the back of shareholders' improving confidence in the company’s turnaround story. In the third quarter, the company achieved a revenue growth of 1% on a year-over-year basis for the first time in three years. Also, it reported a non-GAAP earnings of $0.89 per diluted share, which is at the high end of management’s provided outlook and around $0.03 up from prior year period. One of the most important indicators of a good turnaround is the quantum of cash that the company is generating because in a way, it represents value created for shareholders. Here as well, HP delivered strong performance, delivering $2.7 billion in free cash flow for the quarter, a good sign of improved operations and financial discipline.
While the stock price surged after the company sprang the revenue growth surprise and also as a result of the analyst upgrades. Also, HP’s strong cash position encouraged the company to raise its guidance for the fiscal 2014. It escalated its fiscal 2014 EPS guidance to $3.70-$3.74 (from $3.63-$3.75), including October-quarter EPS of $1.03-$1.07 (Wall Street expectation at $1.05). Given the strong free cash flow generation year-to-date, HP increased its free cash flow guidance to $9 billion for fiscal 2014 with a firm commitment to return at least 50% of cash flow to shareholders via share buybacks and dividends in fiscal 2014. This implies about $1.6 billion of free cash flow in the fourth quarter and has very healthy buyback implications ($1.5 billion-$2.0 billion).
Innovating its way to success
It is no stranger to the investor community that HP had to suffer some horrific times on the exchange after the Autonomy deal debacle complimented by the headwinds in the PC industry. However, the company under the guidance of CEO Meg Whitman has shown slow and steady improvement in performance and solid cost management that has resulted in the above-mentioned flowery figures. Now, Whitman has mentioned the need for product innovation umpteen number of times and, true to that philosophy, the company has invested credible efforts and money into sustaining innovation.
As a testimony to HP’s increasing commitment to innovation, I would like to take a few moments to discuss HP Helion, an enterprise cloud platform by the company that comprises cloud products and services which provides customers with the ability to install a platform that is not only tuned for the present technology, but holds the infrastructure to incorporate future innovation. At present, a large number of organizations find that their data centers are unable to keep pace with the need to rapidly adopt new processes, products or new business models. Hence, this cloud portfolio is like a one-stop resource for organizations looking to build an efficient, scalable and flexible cloud ecosystem.
There is room to grow
At the onset of this article, I mentioned that HP has gained approximately 157% on the exchange until date and hence, one of the fundamental questions that bothers investors is whether the stock is capable of more growth. To begin with, it is significant to note that HP’s return on equity has been 21% during the past year, above the peer average of 17%. Currently the stock is trading at a forward multiple of around 9.3 as compared to the industry’s average of 12.72. Also, HP’s current P/E stands at 13.90, which is lower than the industry average of around 20. Also, the stock price is 4.44% above its 20-day simple moving average, 6.52% above its 50-day simple moving average and 19.56% above its 200-day simple moving average thereby indicating a reasonably strong upside in the short and mid-term.
In my opinion, HP has created a sufficiently comfortable cash position for itself and its current EV/EBITDA ratio stands quite low at around 5.6. Also, the opportunities presented by an improving PC industry and company’s foray into the cloud segment justify the upside in stock movement. Therefore, this is a good time to invest in the credible turnaround story that is Hewlett-Packard.