HP Looking Good Despite Poor Third Quarter Performance
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Hewlett-Packard (NYSE: HPQ), the world’s largest PC maker, offered a poor mix of results to investors as it came out with its fiscal 2012 third quarter earnings. The company reported the worst loss in its 73 year history and as an obvious reaction of the market, the stock price plunged 5% in the after-hours trading. Though the company did well when it came to beating its own guidance, its top line took a 5% dip while the bottom line was in the red and reported a GAAP loss per share of $4.49, down from $0.93 EPS of the prior year period. The quarter saw a lot of activity especially related to the new restructuring plan. Let’s take a peek into what HP’s been up to.
A peek in to the quarter
Moving on to the numbers, the quarter did not go that well for HP. The Palo Alto based company reported total revenue of $29.7 billion and thick red bottom line of $8.9 billion, resulting in a GAAP loss per share of $4.49. This massive loss figure didn’t come as a surprise to anyone as the company had already announced that it was expecting a charge of $8 billion related to the impairment of Electronic Data System, its $13 billion 2008 acquisition. This huge charge along with other charges related to impairment of goodwill and on-going restructuring efforts, which includes the severance payments to employees who were downsized, resulted in the after tax cost of $5.49 per share and this pulled down the bottom line from a positive to a negative figure.
So, does that mean excluding the impairments and the restructuring HP is looking a lot better? The answer is no, though one may say the situation improves marginally and comparatively. On a non-GAAP basis, the net profit figure plunged relatively less at 9%, resulting in an EPS of $1.00, but still higher than management’s expected EPS of $0.94 to $0.97. HP’s business segment’s performance continued to be depressing as only one out of six segments showed growth. On a year on year basis, the Software segment, with 18% growth, was the only business segment which looked good while the Financial Services business witnesses flat revenue. Each of the remaining segments reported a fall in performance owing to various reasons related to the gloomy economy. The management also expects to report a full year GAAP loss per share in the tune of $2.23 to $2.25.
Though performance hasn’t been up to the mark, everything is not looking bad for HP. The company faced some great customer wins during the quarter as it added Russian Railways, US Air Force, NASCAR and Consolidated Graphics in its list of clients. Also, in the area of cloud and information, HP introduced a number of innovations which also includes an enhancement to Cloud System, its flagship offering.
What else is going on at HP?
HP, which employs more than 300,000 people worldwide, is going through a multi-year restructuring and as a part of the plan laid off 4,000 employees during the quarter with plans to lay off another 11,500 employees by the end of the October, up from the previous estimate of 9,000 employees. The giant also plans to drop another 15,500 employees from its pay roll by October 2014. The entire downsizing move is expected to generate annualized savings of $3 billion to $3.5 billion which will help HP to survive during its current rough patch.
However, HP is not the only one facing these troubled times. The performance has been poor for the majority of PC makers across the world and this has to do mainly with macroeconomic issues as well as intense competition from newer technology. Recently, the world’s third largest PC maker Dell (NASDAQ: DELL) also came out with its earnings and the results were not very far away from that of HP’s. The Round Rock based IT giant reported an 8% fall in its top line and an 18% drop in its bottom line as it confirmed that the PC sales were low as the economy continues to face demand weakness in emerging markets and Europe.
Again, the ongoing trend of replacing the traditional PCs with tablet computers is also acting as a severe blow to PC growth. The rising popularity and the wide-spread adoption of tablets from makers such as Apple (NASDAQ: AAPL), Samsung and soon to enter the market Microsoft (NASDAQ: MSFT) poses as the main competition for players such as HP, Dell and Lenovo. Though HP has been more successful than Apple and Samsung when it came to laptops, the giant started lagging in the tablet’s space and in order to counter this issue HP is trying to restructure it and now focus more on developing its own range of smartphones and tablets. But there is a problem in this also. Now that Apple has won the patent lawsuit against Samsung, HP might face additional issues in bringing out its Google (NASDAQ: GOOG) Android powered tablets in to the market as the chances of lawsuits for using Android remains high. Again, as per the announcement made by the Windows maker Dell, Lenovo and Samsung will be working on Microsoft’s Windows RT powered tablets and there was no mention of HP. So, HP can either carry on with Android and alongside risk getting involved in a fight against Apple, or can get a license from Microsoft for using the new Windows platform and thus leverage its expertise to make tablets like the Surface which will compete with PCs.
Despite these, HP looks attractive
Despite the challenges and the poor performance in the recently ended quarter, HP is looking good as it is showing progress in terms of turning around the company. Since the time Meg Whitman joined HP as the CEO, she has been stirring things up within the company by reorganizing divisions, reassessing the business focus and cost reduction measures through job cuts and all of this has made it possible for the company to report better operating profits even in challenging times. One of the prominent signs of progress is the ability to clearly and accurately predict earnings and HP has been able to do that for some time now. The stock is looking attractive to the investors as the company also returned $625 million in cash to the shareholders through dividends and share buy-backs.
Though the company is the midst of a turn-around effort, it is making substantial improvement in terms of generating cash. This quarter HP reported a $2.8 billion operating cash flow and $2.1 billion free cash flow. So, as long as HP can generate enough cash to meet its debt obligations and also return some amount to the shareholders, there is not much reason to worry. Even in a poor market condition, such as the current one, HP is making good quantity of cash and this only says how well the company will do once the market becomes stronger. Against competition also HP is looking more attractive with price being around 4 times of its earnings. Against Intel’s P/E of 10x and Microsoft has a P/E of 11x, HP is also looking much more safe and less expensive in the event of the world economy actually suffering another slowdown.
Promising restructuring efforts, an attractive valuation, and the company’s new focus on entering the tablet market are all suggesting its responsiveness towards the changing market place – everything is looking attractive and making me pretty bullish on this stock. I think it’s a good time to enter this stock and then hold on to it as better results can be expected in the future.
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