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Hewlett-Packard (NYSE:HPQ) rose 12% after the company reported first quarter earnings that trounced analyst estimates. Instead of reporting a drop in earnings to $0.79 to $0.71 per share on declining revenue of $27.79B as analysts and even HP forecast, HP delivered $0.82 per diluted share (non-GAAP) on revenue of $28.4 billion. HP traded at $14.04 when the company was last viewed as being on track for a comeback. How much upside remains after the recent rally? There are 6 reasons why there is further upside for HP.

1) Long-Term Turnaround Intact

HP is in its second year of its business restructuring. The company does not expect to fully recover and expand until 2014. To achieve this long-term goal, the company is improving its balance sheet, reducing costs, innovating on its products, and aiming to be a leader in each of its product lines. The strong quarterly earnings set the company on the right track. Two key products in the declining PC market provide an example of product innovation: the EliteBook Revolve and the Google Chromebook. Despite shipments declining by 5%, HP's diversification from Microsoft (NASDAQ:MSFT) Windows 8 will broaden its brand to a wider customer base.

2) Improving Financials

Cash flow improved by 115% from a year ago period to $2.6 billion. The company reduced its net debt by $1 billion to $4.7 billion. The company aims to eliminate its debt by 2014, but thinks it can achieve this goal earlier.

3) Better Results from Printer Unit

HP managed to improve margins in printing by 3.9%. Again, small innovations helped as HP released new multi-function printers in the last quarter. Ink sales grew by 32%. The recent release of Officejet Pro X should help reverse declines in the printing unit in the quarters ahead. HP has many marketing opportunities at a time when corporations and small businesses are receptive to cost-cutting and efficiency. HP advertises Officejet Pro X as offering similar printing speeds as laser printing, but at half the cost.

4) HP Tablet

The release of the HP ElitePad 900 keeps the company operating within its core competency. The tablet runs on Microsoft Windows 8 and was advertised as being thoroughly tested for quality. Quality was an issue for consumer-based computers. Extending quality control for all products would earn back customers unhappy with poor product quality.

In the consumer space, HP will be launching an Android-based tablet in April 2013, which under-prices Google's current Nexus 7.

5) Growth in 2014

HP does not expect to grow until 2014 at the earliest. Autonomy and 3Par are too small to contribute to growth. In Q1, software revenue accounted for 926 million in revenue, down 2% from last year. Still, HP recognizes the growth in convergence and server storage. The company is betting that energy savings in servers will matter to customers. Codenamed "Project Moonshot," HP is designing servers that are powered by Intel's (NASDAQ:INTL) Atom chip.

6) Valuation

HP expects to earn $3.40 to $3.60 (non-GAAP) in fiscal 2013, which values the company at a forward P/E of between 5.3 and 5.65. By comparison, Dell (NASDAQ:DELL) was recently valued with a forward P/E of 8.2. Microsoft has a forward P/E of 8.81. Although HP will not be breaking itself up or putting itself up for sale, shares would be worth between $27.88 and $29.52 if it were valued similar to that of Dell.

All three companies pay a dividend. Investors are paid a yield of 2.8% for holding HP shares and waiting for the turnaround to take hold:

SYMBOL

DIV

EX-DIV

DIV RATE

DIV YIELD

DELL

0.1

12/28/2012

0.32

2.30%

HPQ

0.1

3/11/2013

0.53

2.80%

MSFT

0.2

2/19/2013

0.92

3.30%

(Data Source: Seeking alpha)

Conclusion

Investors who bought HP when the company was last reviewed may sell shares, pushing its price lower in the short-term. Macroeconomic challenges remain, which will limit revenue growth in regions like the Americas or EMEA. In the last quarter, HP reported a 3% and 11% decline in those regions, respectively. Weak demand in the PC market is still expected throughout 2013, but its impact is minimal. The impact to operating profit was small. Last quarter, $223 million profit at the Personal Systems Group division contributed to just 10% of operating profit. Finally, Windows 8 was not the catalyst investors hoped last quarter. This gives HP the opportunity to design hardware in ways that improve consumer interaction with HP products. As a hedge, HP is not constrained to Windows 8, as its partnership with Google for the Chromebook gives HP a wider audience for attracting potential customers.

Source: 6 Reasons Why HP Still Has More Upside