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Hewlett-Packard has More Upside

June 19, 2014 | About:

It has no doubt been a long and winding road for Hewlett-Packard (NYSE:HPQ) trying to get their business churning the way it once was years ago. CEO Meg Whitman has been doing everything in her power to return the once lucrative company back to its days of yore. Whitman's effort has been going on for a few years now, and she commented during HPQ's earnings on May 22nd that the turnaround remains on track.

As you can see, HPQ stock has been heading in the right direction for the past six months. For the last year, the stock has risen 34.3%. Since the beginning of 2014, the stock has returned 18.3%, and for the last three months alone, shareholders have reaped 10%. Meg Whitman appears to be going over just fine with the markets, despite what some of the headlines would seem to dictate.

Also catalyzing the stock wasn't the impressive earnings that HPQ posted - because they were far from impressive - but the fact that the turnaround of the company appears to still be on track.

The company's recent earnings met estimates and revenue came in lower than what was expected. The company posted $0.88/share EPS on revenue of $27.3 billion versus analyst expectations of $0.88/share EPS and $27.4 billion in revenue. Hewlett-Packard came right out and said that they were going to be cutting an additional 11,000 jobs in order to curb costs and improve efficiency. This makes nearly 50,000 job cuts for the company since its restructuring began.

The cutting of employees should big a big help to the bottom line. Annually, it should save the company around $3 billion. After its earnings, various sources reported:

  • After releasing its core results early, H-P has provided its full FQ2 report after the close. The IT giant guides for FQ3 EPS of $0.86-$0.90 vs. an $0.89 consensus, and FY14 EPS of $3.63-$3.75 vs. a $3.71 consensus.
  • H-P also announces it's increasing the size of its job cuts by 11K-16K positions. The company, which had ~317K employees last year, has already announced plans to shed 34K jobs.
  • $831M was spent on buybacks in FQ2, helping EPS meet estimates in spite of a revenue miss. Gross margin rose 50 bps Y/Y to 24.2%. R&D spend +7% Y/Y to $873M, SG&A spend +1% to $3.39B.
  • Contributing to the revenue miss: Printing revenue fell 4% Y/Y after falling 2% in FQ1, enterprise hardware fell 2% after growing 1%, and enterprise services once more fell 7%.
  • PCs were healthier (+7% vs. +4%, with 12% commercial growth offsetting a 2% consumer drop). As was software (flat vs. -4%, with 8% license growth). Financial services -2% vs. -9%.
  • High-margin printing supplies revenue fell 7%, while printing hardware units rose 1%. In enterprise hardware, a 6% drop in storage and a 14% drop in business critical systems (Itanium weakness) offset a 6% increase in networking. x86 servers rose 1%.

As noted, the company offered a guidance range that was right around what analysts were expecting as well - offering $0.86-$0.90 versus an estimate of $0.89/share.

But the company continues to falter. Since Whitman has taken the helm, the company's sales continue to decline. However, as [BlackBerry CEO] John Chen also knows, turning around a failing company doesn't take place "in 30 minutes or your pizza's free." Whitman has continued her commitment to making the company as lean and mean as possible, and has also alluded to the fact that the company will be dabbling in 3-D printing, as well, in the coming future. Whether or not they're throwing themselves head first into a fad is a question that's still up for debate when it comes to 3-D printing - but that's another discussion for another day.

But it's looking at the stock's valuation that really gives me some pause as to whether or not HPQ is ripe for the investing. The market seems to have totally given up on the company.

With a forward P/E of 8.49 and a price/book ratio of 2.26, Hewlett-Packard's valuation has been roped in significantly. If you're a Meg Whitman believer, this stock looks damn cheap to you.

The trend could be your friend here. The market obviously thinks that the company is on its way to a turnaround and is underpriced with the way they've been bidding the stock up for the last 6 months. Don't think that you've missed it all, because if Whitman can reverse course with this company, HPQ is going to have way more potential upside - likely to the tune of 30% from here, which would give the company a more modest forward P/E.

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