Wait For Pullback Before Getting Into HP

| About: HP Inc. (HPQ)

Hewlett-Packard Company (NYSE:HPQ) is a leading technology company that is best known for its personal computers and wide array of printers. The company has a market cap of $49.9 billion, and its stock price is around $26. HP is a company that is in a state of flux. The company has seen the market for its core businesses shrink dramatically. The biggest problem for HP is the new technologies that allow it former customers to communicate and gather information on their smartphones and tablet computers. Unfortunately for HP it was slow in adjusting to the new technologies and the change in market direction. As a result of the company's lack of foresight its earnings and stock price saw sharp declines. Other PC dependent companies such as Dell Inc. (NASDAQ:DELL), Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC) also suffered. Companies that took advantage of the move towards mobile computing devices such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Samsung, have seen their earnings and stock price explode to the upside.

What are the Hewlett-Packard Company's Plans for the Future?

After going through several CEO's HP made Meg Whitman its new CEO on September 22, 2011. Meg Whitman did not promise miracles or even a quick turnaround. However she told Hewlett's employees and investors that the company would reinvent itself. In October of 2012, Meg Whitman laid out the company's "Three big themes going forward: Cloud, Security, and Information.". She made it clear that changing the direction of the company would be painful and take time. In an interview with CNBC on June 13, 2013, Ms. Whitman announced that the company still had a long ways to go in its effort to re-invent itself. She then turned positive, and noted that the company had slimmed down its product lines and that HP currently has "the strongest lineup that HP has seen in many years."

HP has not abandoned its core business, rather it has made improvements to many of its products, and changed its focus from designing home PC to designing computers for business use. For instance, the company will soon be offering new and improved laptops that will be 36% slimmer and 18% lighter than their previous laptops. The new laptops are designed for use by small and midsized businesses. Another of HP's new products is it Moonshot servers. These servers are also designed for small and midsized businesses, and they will use 89% less power and be 80% smaller than the older models. It is good to see that Hewlett has not abandoned its core business, but when Meg Whitman announces its 3rd quarter earnings on August 21st investors will be looking to see how well are the company's restructuring initiatives are doing. After all investors are not expecting the company to report dramatic upswings in its revenues or profits. In the 2nd quarter key parts of HP's business saw reduced sales. For example:

  1. Notebook sales fell 24% on a year over year basis
  2. PC sells fell 29%
  3. Data storage sales fell 13%
  4. Business server sales fell 12%

Everybody knows that the sales of PC's and peripheral products are slow, so what investors will really be trying to learn from HP's 3rd quarter earnings call is how well are HP's new business initiatives doing. For instance:

  1. How well is Hewlett's cloud business performing?
  2. How well is the Software business performing?
  3. Does HP plan to develop, or manufacture smartphones, and if so what operating system will it use?
  4. How does the company plan to become a player in the 3D printing business?

The consensus analyst's predictions are for HP to have revenues of $27.3 billion and earnings of $0.87 per share. If the company does achieve a profit of $0.87 per share, that will be a per share increase of $5.36 from the third quarter of 2012. That will boost investor's confidence in Meg Whitman's turnaround plan, and while revenues will be roughly the same investors will be impressed by the effectiveness of the company's cost cutting measures.

Moving Forward

In that same June 13th CNBC interview Meg Whitman said she "sees revenue growth as a possibility" for HP in the upcoming fiscal year. However she did admit that the overall performance of the PC market was a big question mark. She went on to say that the company was "a bit ahead" of where she believed it would be at this point on its journey to reinvent itself.

I think that the company has done a good job of cutting cost and streamlining its product line, but I do not think that it has turned the corner. It is unlikely that the PC business will turnaround anytime soon. Also, the company must deal with a weakening global economy. In addition competitors like Dell, Acer computer, ASUS Computer Company and Lenovo Computer Company are flooding the market with low cost computers and hurting HP's PC market share.


HP has done a great job of stemming its losses and improving its bottom line. In addition, Meg Whitman has gotten investors to believe in her plan for the future. HP's stock price is testament to the confidence that investors have in the company. Since the stocks low of $11.35 on November 2, 2012, it has rallied higher by over 125%. After such a large rally, I would not buy the stock at its current price. However I do believe that the stock is a good long term investment, but would wait for a pullback before buying in.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.