A Turnaround is on the Horizon for HP
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Right now is the best time for investors to add Hewlett-Packard (NYSE: HPQ) shares to their portfolio. HP is already implementing a transition and turnaround plan focused on restructuring organically through improving efficiencies, quality of operations and margins within the business.
The current low stock price may be the best opportunity to purchase shares at a discount before the turnaround process begins to reflect the true value and potential of the new HP. Most analysts and reporters seem to be focused on the coming layoffs, but there are many fundamental improvements that HP has identified and is committed to executing. As the largest PC manufacturer in the world, HP is a steal at its current stock price and is a solid long-term investment with high growth potential.
The current stock price for HP is around $22, and the all-time high is slightly under $80 per share, which was hit about 10 years ago. With this new restructuring plan, HP has the potential to surpass its all-time high or at least double to triple its current stock price within the next six years. The current stock price is at the low end of the 52-week range from $20 to $37. The current stock price is also below the 50-day and 200-day moving averages of over $23 and $25, respectively. The market cap is more than $20 billion less than the enterprise value while the beta is above one. These are all typical indications that it is a favorable time to invest in an undervalued stock.
Other promising indications are the current ratio above one, the price to sales cost is only .36 and institutional ownership is above 75%. The operating and net margins along with the return on equity have all decreased over the past three quarters. However, the PEG ratio is close to one and the price is only around 5 times earnings, along with the price to book ratio, both are better than the industry average. The return on equity is right along with the industry average. Investors should note that HP does pay $0.48 in annual dividends per share.
HP has identified its weaknesses and is focused on becoming a more streamlined, efficient company with a rejuvenated focus on R&D and engineering. Improving the quality of products and services offered while eliminating inefficiencies within the organization will prove to be an effective improvement for the long-term.
HP will cut 8% of it labor force through layoffs and early retirement packages. This will equate to a reduction in 27,000 positions at HP by 2014. HP will reinvest this capital savings of $3 billion to $3.5 billion back into the organization for R&D and improvements in back office operations. Executives are poised to take the complexity out of HP in order to make it easier to work for and easier to buy products from. It is Meg Whitman's first six months in the CEO position. Some doubt her potential and applicable expertise from eBay but the plan looking forward is respectable and practical in order to improve the HP business organically. The only mention of acquisitions has been in terms of augmenting the software segments.
Its key to success will be re-investing in employees, career development and training opportunities. Innovation and engineering was the key to HP's early prominence and it is admirable to see rejuvenation in the commitment to R&D rather than pushing out the same mundane products of yore. A restructuring is necessary for HP's survival and it's acknowledged this and is aggressively pursuing it through organic restructuring and margin growth as opposed to mergers and acquisitions. This includes improving its position in the cloud security, networking and software as service industries. Capitalizing on the Autonomy acquisition will also help improve HP's value worldwide. Whitman cites scaling issues as the catalyst for hampered earnings so far but HP's intent on consolidating the operations in order to implement Autonomy's service more effectively into the business model and product suites. Focusing on cloud computations, big data analytics and networking services will help create more high-margin opportunities for HP aside from its traditional product offerings.
This is just the beginning of HP's transition, but it will create many opportunities to compete with Apple (NASDAQ: AAPL), Cisco (CSCO), and other tech sector brands as it expands its book of business into the cloud and software services sector. Apple's supply chain strength has made it tough for HP's tablet push. For example, HP has to wait for Apple's exclusivity deals on touchscreens to expire before it can get in on the deals. This is one area where HP's restructuring can improve to compete with juggernauts like Apple. Microsoft's (NASDAQ: MSFT) Windows 8 will have a serious impact on the rebirth of demand around the world for HP and Dell (NASDAQ: DELL) products. According to Acer Group founder Stan Shih, "If Microsoft doesn't have a good Windows 8 (product), it will be a big loss for Microsoft and then Taiwan. HP and Dell will also be affected." Dell's Windows 8 based tablets will directly target Apple's iPad, so it is equally critical for Dell that Windows 8 is a success.
HP has already begun to rebuild the balance sheet. Now improving internal systems and reinvesting to create more innovative products and services is the next step. Investing in shares now is the best opportunity for substantial returns before the stock price begins to rise with the potential progress of Q3 and Q4 in 2012.
jewishitalian31 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.