You Will Make Money From This Turnaround

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

Those who invested in Hewlett-Packard (NYSE: HPQ) at the beginning of the year are now enjoying a spike of around 45% in the stock price. The company has had some serious troubles in the past, resulting in the deterioration of its stock price. However, the turnaround strategy has now started paying off, leading to higher satisfaction among the shareholders.

While companies like Dell (NASDAQ: DELL) and International Business Machines (NYSE: IBM) have already shifted their focus onto the services and analytics segment, HP is still in the process of this transition. This transformation also offered shareholders a happy ride alongside rising stock prices. But the bigger question at this moment is:  “Will this growth ride continue?”

Let’s discuss this stock in detail.

Restructuring on track

2013 will be the year of recovery for Hewlett-Packard, as it's when most of the restructuring will be completed. The restructuring activities focus mostly on cost-savings and the alignment of the company's workforce to support various growth initiatives and innovations.

HP's restructuring is on track with a target to reduce 29,000 (up from 27,000) employees by the end of 2014, out of which 15,300 workers have already been retrenched.

This workforce reduction will result in projected savings of around $3 billion to $3.5 billion annually, and the majority of these savings will enhance the company's bottom-line results in 2013 and 2014. And, the remaining savings will be reinvested in R&D across storage, cloud and security solutions.

The growing platform

Since the acquisition of Vertica in 2011, HP has been betting big on its investments in big data analytics. Vertica is a prominent big-data services vendor. As per IDC, this industry is expected to expand at a compounded growth rate of around 31% annually through 2016.

I believe Vertica's further penetration into this market is immensely supported by HP's global channel reach. While most of the current data warehouses concentrate on structured data, Vertica offers solutions for semi-and-unstructured data, such as log data, communications and weather data.

Also, HP recently announced that it has increased its R&D investments under the recovery plan. It's targeting around $1 billion on R&D and the marketing of its big data portfolio this year.

Out of this, $800 million is allocated for Vertica. The company is seeing huge potential in Vertica, which now has 10-times the revenue that it had at the time of the acquisition. I see Vertica as the next growth pillar for HP and expect it to continue the same revenue growth in the future, as well.

Peer review

As stated above, Dell and IBM are slightly ahead in the race as far as the transformation is considered. Since the buyout news started floating in, Dell shares have gained momentum, producing returns of around 50% in the last six months. The company is still looking out for some attractive buyout offers for its shareholders.

Most recently, The Blackstone Group and Icahn Enterprises have submitted their buyout offers to the committee. Blackstone has offered around $14 per share, in association with other private equity firms. On the other hand, activist investor Carl Icahn has offered $15 per share for a 58% holding. Investors can surely see some decent upside in the stock if a deal is completed.

IBM, on the other hand, has been fairly successful in keeping its business operations more stable. Most of its earnings growth is derived from higher margins. IBM is relying heavily on big-data and business analytics for its future growth. It's one of its four growth initiatives, along with cloud computing.

IBM is targeting business analytics to grow into about a $20 billion business in the next two years. Acquisitions will be the major contributor under this strategy. In 2012, IBM acquired around 11 companies for nearly $4 billion, out of which most of the targets offer analytical solutions.

The most recent on the list is its acquisition of Star Analytics, which is an analytics software provider. This acquisition will further expand IBM's portfolio of analytics over the long term and will also complement its previous acquisitions of Varicent, OpenPages, Cognos and others. Based on these initiatives, IBM's EPS is expected to grow to around $3.05 by 2015.

Conclusion

I feel HP is a defensive investment, considering the large portions of its recurring sales, significant cost-saving initiatives and its investments in big data analytics. HP is confidently moving into other sectors, and in the process it is stabilizing its bottom line.

This has been a winning strategy for the company and for investors so far in 2013. I believe this run will continue in the future as well, and this could be a perfect time to enter into this stock in order to gain out more from the turnaround story. 


Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines.. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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