Can HP Mount a Full Recovery?

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

It’s almost impossible to be the leader in a significant business category and still be grossly irrelevant at the same time. Somehow, Hewlett-Packard (NYSE: HPQ) has manage to accomplish this. Although the company still has thriving segments such as printing and services, HP has become the poster child for what happens when misguided objectives cross paths with shifting markets. Unfortunately, there aren’t quick fixes. It’s going to take time and hope.

Is There Light at the End of the Tunnel?

There’s just too much value in the company to ignore. We can debate strategic moves and what it would take to realize that value, but it’s there. And the company is not performing all that poorly – at least not relative to expectations.

For instance, in its most recent quarter, HP posted revenues of $33.6 billion – exceeding estimates of $33.1 billion. Likewise, the company reported adjusted net income of $1.16 per share versus the $1.14 per share estimate. Does this mean everything is great? Far from it.

The company’s diluted EPS was a loss of $3.49. Although HP beat its revenue target, sales fell almost 7% year-over-year. For that matter, revenue has fallen in the past four quarters, including a net loss of $6.85 billion. Then again, it’s not as if rival Dell (NASDAQ: DELL) has performed any better.

Dell reported an 11% year-over-year decline in revenue, which also arrived 5% worse sequentially. Declines appeared in every segment led (obviously) by a poor PC performance which posted an 18% drop year-over-year. Dell’s laptop segment dropped 26% while software and peripherals shed 11%.

Meanwhile, Apple (NASDAQ: AAPL) has seen devices sales continue to surge - reaching 53% market share according to a recent report by Kantar Worldpanel ComTech, which tracks sales data. Essentially, while PCs are (in fact) dying, mobile devices have yet to peak. This means that both Dell and Hewlett-Packard are in the wrong business.

Also, with Microsoft (NASDAQ: MSFT) opting to build its own Surface tablet, Hewlett-Packardl was essentially told by an OEM partner that it can no longer be trusted to build a platform that won’t make Windows 8 look bad.

Unfortunately for HP, early sales reports suggest that Microsoft’s Windows 8 has yielded very little in terms of PC sales, which have actually dropped almost 9%. In other words, both sales of Surface and Windows 8 have been abysmal and should no longer be considered a catalyst for PC growth.

Where is the Company Heading?

That’s a difficult question to answer. At least, not without first considering does the company’s current management have the capacity to lead HP out of this rut. At this point I’m not convinced that it does. Meg Whitman is a good manager and I appreciate that HP’s turnaround is going to take more time than expected.

Although she inherited quite a bit of this mess, it should escape no one that she was on the board and approved the poor deal for Autonomy. But more importantly, what are the new growth markets that will propel the company higher?

HP is proving to be no threat to Cisco in areas such as networking. And HP hasn’t fared much better in its storage business, which dropped 13% year-over-year. In other words, the company has very little chance to overtake market leaders EMC and NetApp. And how long will the company remain in the “fixing stage?”

For the full year fiscal 2013, the company projects EPS to arrive at $3.40 to $3.60. It will be very challenging to meet even the mid-range of that target – especially since the company has no answers to reverse the decline of PCs. While HP might be able to dominate Dell, Lenovo on the other hand is mounting a strong surge. Can HP keep its fainting PC share in tact? I don't see how it can.

Unfortunately, analysts feel the same way as average estimates for Q1 have moved down from $1.03 a share to 85 cents over the past three months. Likewise, during that span, the average estimate for the fiscal year 2013 has fallen by 3 cents to $4.03.

Bottom Line

I’ve always liked HP, but the stock has a long way to go before it becomes a legitimate buy. The company must figure out a way to re-invent itself. And current management has proven incapable. Also, the current yield is not enticing enough to inspire patience while the company gets its act together. That the stock has gained 45% over the past two months is a perfect opportunity to lock in gains and wait for a better entry point – 30% lower.

rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple, Microsoft, and Oracle. Motley Fool newsletter services recommend Apple and Microsoft. 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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