The Foolish Case for Hewlett Packard

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Hewlett Packard (NYSE: HPQ) has been the market leader in personal computers for a long time. However, the global slowdown in this segment has forced the company to change its focus and turn to new avenues for growth. At the moment, consumers do not want anything other than tablets and smartphones, which paints a grim picture for the PC market.

HP is still the leading player in the PC market, but the rise of tablets, led by Apple (NASDAQ: AAPL), has contracted the market. Apple became so big it absorbed almost all the markets it entered, making HP just one of its many victims. HP has lost almost two thirds of its market cap since 2010, when the company had a market cap of over $100 billion.

About a third of HP’s revenues come from Europe, which is reeling from economic uncertainty. However, I do not believe all is lost for the company. Obviously, there are some challenges ahead, but I remain confident that HP will be able to deal with them fittingly. Let’s look at some of the challenges and solutions for HP in its recovery.

Is HP too late to enter the Tablets Market?

HP was a little late to the lucrative tablets market, and lost on the growth it could have achieved from it. However, it’s never too late if you can come up with better technology to enhance the consumer's experience. The company tried to enter the market in 2010 with its own operating system, called WebOS. However, the company did not get much success in its adventure and had to conduct an online fire sale. Now, the company is going to enter the market with Windows 8, which should provide it a better platform. In addition, HP is currently working on its own Smartphone, which is also likely to run Windows 8. The launch of new tablets and smartphones can drive the company forward, if executed properly.

Restructuring

I am impressed with the restructuring steps Meg Whitman has taken. By trimming down the workforce, HP will be able to achieve considerable cost savings and efficiency. HP has been losing ground in PCs to Asian manufacturers such as Lenovo, which operate at lower cost. It has been shifting its focus to software and services for businesses under Meg Whitman. The company is merging its printing and PC divisions, and has shaken up its services business. Moreover, the decision by management to plough the savings into the research and development shows that the company is committed to coming back stronger.

At the moment, it is extremely important to cut down the costs to bring up the deteriorating margins. Further, the decision to focus on fewer products in the PC segment will streamline the operations of the company. It is vital for HP to focus on the profitable components of the PC market and eliminates the redundant models. However, the restructuring will not be complete any time soon, and investors will have to wait another two years to see the effects of cost savings.

How the changes at HP might affect others?

A slowdown in PC sales has affected the computing industry, and several of its key players are facing declining revenues. The biggest loser from this ordeal can be Intel (NASDAQ: INTC), as HP is one of its biggest customers. As a result, Intel had to cut its outlook for the year. I still think Intel is a cheap stock, as it is trading at a substantial discount to its intrinsic value. However, I cannot say the same thing for Advanced Micro Devices (NYSE: AMD).

AMD is another victim of slow PC sales due to its heavy reliance on PCs for a major portion of its sales. At the moment, the company is trying to transform into an enterprise computing corporation that can compete with IBM (NYSE: IBM) and Dell (NASDAQ: DELL). However, competing with such giants requires very deep pockets, which AMD does not have at the moment.

Dell is also trying to establish itself in the enterprise computing market. However, a comparison with IBM in enterprise computing would be unfair to HP at present. IBM has a strong presence in the area and increased its full year outlook reflecting its ability to manage costs. On the other hand, HP will have to go through a year of change and then establish itself as an important player in the market.

Foolish Summary

It is evident from the strategies applied by the company that management is focused at the long term stability. What has impressed me is that management has not been shy of coming out and talking about the core problems at the company. Instead, they have been quite open and seem to have a clear idea about where they want to be in the medium and long term. The biggest problem under the two previous CEOs was that management and customers were equally confused about the direction of the company. HP will still face one or two tough years ahead, and margins will not be pretty. However, the company seems to have found its focus, and I remain confident that it can achieve previous levels of success.

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ecofinstat owns shares of Apple and Intel. The Motley Fool owns shares of Apple, International Business Machines, and Intel. Motley Fool newsletter services recommend Apple, Dell, International Business Machines, and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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