The 'Retire Young' Portfolio: Hewlett-Packard's Recovery Continues On

| About: HP Inc. (HPQ)

On Tuesday evening, Hewlett Packard (NYSE:HPQ) announced its quarterly earnings figure which seems to have impressed the investors as the company is rallying in the after-hours at the time of writing this article. The company's net profit of 87 cents (excluding one-time items; otherwise, it was 55 cents per share) beat both the company's earlier guidance of 80-82 cents and the 81 cents the analysts were looking for. The company generated $27.6 billion in revenues (analysts were expecting $28.01 billion), which is down 10% compared with the same quarter a year ago. Similarly, net income was down by 11% compared with the same quarter last year when the company generated 98 cents per share in earnings.

Personal systems, the segment of HP that develops computers reported 20% revenue decline compared with last year as it generated $7.5 billion in revenue. Overall, the PC industry is in a deep trouble, and HP's PC sales fall at an even faster rate than the overall industry. On average, PC industry reported a sales drop of 14% compared with HP's 20% drop. This is HP's largest yet worst-performing segment, which is worrisome for the company. This is the seventh quarter in a row where HP reported a decline in revenues and the trend might continue on for a few more quarters.

Printing revenue was down from $6.13 billion to $6.08 billion. Enterprise Group revenue was down from $7.55 billion to $6.82 billion. Enterprise Services revenue was down from $6.49 billion to $6.00 billion. Software revenue was down from $970 million to $941 million. Finally, HP Financial Services revenue was down from $968 million to $881 million.

For the current quarter, HP sees itself earning between 84 cents and 87 cents whereas the analysts were expecting it to guide towards 83 cents per share. For the full year, the company expects to earn between $3.50 and $3.60, which an improvement from its earlier guidance of $3.40 to $3.60.

For the last 3 months, HP generated $651 million in positive cash flow and for the last six months, the company generated $1.94 billion in positive cash flow. During the last three months, the company has paid $1.55 billion in debt, $797 million in repurchases and $283 million in dividends. Furthermore, HP issued $154 million in new debt and $157 million in new stocks for employee compensation. Excluding these items, HP's quarterly cash flow would have been $2.97 billion. Currently, the company has $13.24 billion in cash.

HP's margins were mixed for the quarter. In Personal Systems segment, the operating margin was 3.2%, which is up 0.5% for the quarter but down 2.2% for the year. In Printing segment, the operation margin was 15.8%, which is down 0.3% for the quarter but up 2.6% for the year. Enterprise Group had an operating margin of 15.9%, which is up 0.4% for the quarter but down 2.0% for the year. Enterprise Services enjoyed an operating margin of 2.6%, which is up 1.3% for the quarter but down 1.1% for the year. Finally, Software segment enjoys 19.1% in operating margin, which is up 2.1% for the quarter and up 1.4% for the year. Overall, HP enjoyed an operating margin of 8.6%, which is up 0.7% for the quarter but down 0.3% for the year. There is still a lot of road to travel for HP, which plans to cut down its workforce by 29,000 employees by the end of 2014 in order to cut costs and maximize its margins. Since last year, HP's costs were down by 8.8%, which is good; however, the revenue fell at a faster rate as I mentioned before. HP will have to cut its costs at a faster rate than its revenue is falling.

Once again the company's CEO Meg Whitman urged investors and analysts to be patient with HP in its "multi-year journey" as it is going through a major restructure. Since 2010, the company has changed three CEOs and Meg Whitman wants to make a permanent impact at the company.

Despite mixed results, HP's share price was up by 14% in after-hours trading. It looks to me like investors have a lot of confidence in Meg Whitman. More importantly, the investors are realizing that things are stabilizing at HP, now they know that the CEO is here to stay and they can depend on her for results. When Whitman first started her job, many people considered her as a transitional CEO and they expected her to be out of the door in a matter of months. As she's enjoying the second year of her leadership at the company, Mrs. Whitman is looking forward to spending many years at HP. As long as the investors and board members support her, she'll continue to be at the helm. Wednesday's rally was more of a vote of confidence by the investors to Mrs. Whitman than anything.

I've been an investor of the company for more than a year. Moreover, the company's stock is included in my "Retire Young" portfolio. In that portfolio, we hypothetically purchased 500 shares of HP at $20.63 and sold covered calls expiring in July with a strike price of $22.00. As a result of the premium of $82 per contract, we were able to reduce the breakeven price to $19.81. Currently, the company trades for $24, which means we are going to miss out on some of the profits; however, we still made a pretty profitable decision. In my real-life portfolio, I will repurchase the call options once their time value drops to zero (probably on the expiration date) and write new calls because I intend on keeping this company in my portfolio for a long time.

Disclosure: I am long HPQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.