3 Reasons to Consider Hewlett-Packard Now

Hewlett-Packard (HPQ) has lagged other technology companies in the last two months as tech has surged. The company reported an awful quarter on May 19 after the market closed. CEO Mark Hurd reported earnings that were roughly in line but guided revenues for the ongoing quarter strongly downward, dismaying analysts and investors.

On the news, shares fell $1.88 to $34.70 in after-hours trading. For HP, second-quarter net income declined to $1.72 billion, or 70 cents a share, from $2.06 billion, or 80 cents, from a year earlier.

A litany of grim numbers came with the quarter including a 19% decline in PC sales revenue, a 23% decline in printer supplies and sales revenues, and a 28% decline in sales of at the storage and server unit. The company cautioned that sales would decline further in the current quarter.

The Piqqem Sentiment on HP is running at neutra. Has the much praised CEO Mark Hurd lost his golden touch? No doubt he's gettting hammered, but now is an interesting time to think about whether HP is a good portfolio addition.

Here are three reasons why the future may not be as dire as the markets perceive.

1. Server and storage business is highly leveraged to any economic recovery. HP has very solid sales teams in these areas and its consulting arm does an excellent job of pushing HP enterprise hardware. In the fall of 2009, as the economy starts to recover, sales at this unit will serioiusly perk up. Storage, in particular, is a non-negotiable buy in the era of HIPAA, Sarbox, heavy medial loads, and mandatory system archiviing.
2. EDS has not yet been fully digested. Mark Hurd is an excellent operator but it takes some time to digest a very large purchase like EDS. For that reason, HP is not showing the true synergies off the buy. That will happen later this year, again, as HP, now having lowered expectations, has room to manuveur and more tightly integrate the EDS unit.
3. PC Sales declines are relevants but not fatal. PC sales declines definitely hurting HP more than other players. That because HP still has a significant legacy desktop business for corporate customers, something that is rapidly shrinking. But HP is quickly moving away from desktops and also moving its prices down towards more competitive levels. HP also will perform well in netbooks, as it has a superior retail sales channel as compared to competitors. We don't think Windows 7 really matters much in the short term, but consumers will become more frustrated with their machines as broadband connections speed up and multimedia and TV continues to move the PC. That will fuel some upgrade cycles.

HP is still generating plenty of cash. The company has a nice wad of cash on its books and is among the best managed technology companies in the world. Shares in HP have barely budged all year, as compared to rocket rides up for Dell (DELL), Apple (AAPL), and a host of others.

As a potential long-term play, HP will likely catch up to its brethren in a hurry as soon as sign of a turnaround start to show up.

Comments

[h0nd4r1d3r:]

Mark Hurd doesn't get organic growth. If/when the economy turns around you will see a mass exodus of the most talented employees in the service sector (that EDS thing). Hurd's aggressive and prolonged cost cutting measures have left his employees exhausted; the annual pay cuts this year, April pay reduction, reduced benefits, and restriction of 401k matching. Hurd can't cut deeper, and he has killed his companies ability to expand in the future. I only wish I had sold at $50... I'll settle for $40.

May 20 01:21 PM

[robecom:]

Before you predict HP is going anywhere, get a feel of what the employees are feeling these days. HP is but an empty shell when the economy picks up. Right now the its like a carriage being drawn by starving horses where master whipper Hurd keeps whipping till they fall one by one. Starving horse pulling a carriage full of executives with pockets full of gold and who failed to sell some of their gold to feed the hungry horses.

Demoralized employees = low sales = poor service = no innovation = a company that has lost its shine.. i should have sold all my shares when it was still high. Its time to cut losses

May 21 11:02 AM

[User 417831:]

I agree with the Analysis given above. HP sure is the best bet for a long term investment.

Mark is the right CEO HP has in these times. His strategies have paid great dividends for HP so far.

May 21 11:56 AM