Since 2011, Hewlett-Packard (HPQ) has been reporting a declining trend in sales and that still continues. Due to this slowdown in sales and because of impairment loss for its goodwill, the company has experienced a loss of $12.65 billion in the previous year. In the past two quarters, the company is showing signs of turnaround on the back of some uptrend in its sales performance and stability in its margins.
The Computer Hardware Industry
In 2012, the global computer hardware industry generated around $500 billion of revenue. It is forecast that the revenue figure will top the $650 billion mark by 2015. Competing with global giants like Dell, Intel, IBM, Apple and others in the computer hardware industry, Hewlett-Packard is trying to regain its market share through providing services in computer hardware, computer software, IT services and IT consulting.
Performance of Hewlett-Packard
After 2010, this company started to lose sheen in its financial performance. This global PC giant did actually experience declining trend in its sales figure. Till 2010, the company provided a stable profitability rate to its shareholders. However, a slow down in its sales figure affected the financials of the company in the past two years. In 2012, though the company produced higher operational efficiency ratios with higher asset turnover, the company experienced net loss due to higher operational expenses. It is most likely to turn around from here as many analysts expect that the worst is behind the company.
Incurring loss in 2012
The company had been a successful PC maker till 2011. But, after that, due to multiple lagging factors, it started to post negative growth across most of the segments. The company incurred a loss of $12.65 billion in 2012, compared to a $7.07 billion profit in 2011, and $8.76 billion in profit in 2010. In 2012, the company experienced a sales drop by more than 8% in its products compared to 2011. An additional impairment loss of $13.5 billion for its goodwill added to its woes. All this resulted in an operating loss and therefore, net loss for the company in 2012.
2013, a recovery year of Hewlett-Packard
Due to increased competition in the global market, this company is still struggling hard to regain its position in the computer hardware industry. But, the latest quarterly report of this company seems to show some bit of turnaround in the company's financials. Impairment loss and other management related problems made the company's stock price to go down by around 50 % in the last year. But analysts feel that the company's problems are cleared and the stock is all set to move higher.
The year 2012 has been worse for the company. Management-related problems and other legal issues dampened the sentiment around this stock in the past year. Hewlett-Packard has lower profit margin ratio, return on asset ratio and return on equity ratio compared to other major players in the industry. However, considering the recent turn around in its quarterly performance, the company is expected to show better financials in the next few quarters. This company has higher efficiency ratios compared to the industry. It indicates that, if operating expenses can be controlled, the profitability of the company will increase automatically.
(click to enlarge)
The recent spurt in the company's stock price is coming from the fact that it reported quite a healthy set of numbers. Margins also improved quite drastically showing that the company may turn around from here.
Challenges ahead for Hewlett-Packard
The major challenge for this company in the coming few quarters will be to regain market share, which it has been losing in the past one year. Gaining market share in this environment, in which other PC makers like Dell and Apple have been reporting excellent sales growth, may be a distant dream. But, the company's brand value is still in place and with some good management skills the company may regain its markets share and improve its sales performance. The next quarter's earnings per share is estimated to be around $0.80 compared with $0.55 and $0.63 in the previous two quarters.
This company has low Price/Earnings Ratio and low Price/Book ratio compared with the industry average, which makes it undervalued in its sector. The company is expected to post higher profits in the coming quarters. Therefore, I recommend a 'BUY' for Hewlett-Packard . As the industry is still in growth phase and with the recent turnaround in the company's financials, the stock is all set to move higher.