Hewlett-Packard Is No Longer A Turnaround

| About: HP Inc. (HPQ)


Despite being a turnaround story for the last few years, growth is in servers is the future driver.

Acquisitions in the cloud space can boost top line growth even more, while expanding margins.

With its strong cash flow capabilities and commitment to return 50% of free cash to shareholders supports a $34 price target.

Hewlett-Packard (NYSE:HPQ) has been a turnaround story for a number of years. However, it could now be a growth story. It has a broad product portfolio of printers, PCs and services related to technology infrastructure. It's also still the second-largest player in the global PC market and leader in server shipments.

Because hardware has now become a commodity market, the company is shifting its focus to the relatively high margin business of software and services. Growth is expected to come from data centres.

Restructuring and continued ability to save drives margins

HP's restructuring plan is expected to continue delivering benefits over the long-term, and almost 25,000 people have been made redundant since the program commenced in 2012. In fiscal 2013, the company saved roughly $2 billion in staffing costs and expects to save an additional $1.1 billion in 2014.

Total layoffs under the plan are expected to touch around 34,000 by 2014 and the company is already seen the benefit with a reduction in operating cost of almost 3% in 2013 over the previous year. Other cost savings are expected from better supply chain efficiency and the platform rationalization. The company is also looking to make some acquisitions in cloud computing and storage, a couple big markets with strong growth potential.

2014 and beyond starts with PCs and servers, but leads to mobile

HP is now the largest player in the server market, besting Dell. HP's 4Q 2013 server shipments were up 9.5%, versus a 5.4% decline for Dell and 19.5% fall for IBM. HP's share of total server shipments was up 1.4% to 28.2%. I'd expect server segment shipments to continue to post strong results.

Demand for PCs has continued to decline thanks to tablets and smartphones in developed countries as well as the emerging markets. HP has managed to do surprisingly well and its market share is only slightly lower than the market leader Lenovo. Shipments are expected to decline another 4% during 2014 before registering positive growth in the longer term. It still remains to be seen how the 3-D printing business is going to perform.

Sales are expected to continue to grow given its shift to cloud computing, which requires large capacity servers that are faster and more efficient. It will also allow server companies to develop in-house cloud computing services and develop a revenue stream by charging users.

The market for enterprise mobile devices is growing, but currently dominated by iPads. The market share of Windows tablets is small, at just over 3%, compared to 60% for Android tablets and 35% for iPads.

It's estimated that Windows tablets will gain market share of 10% plus by the end of the year. That's where HP's opportunity lies. HP is looking to grab market share exclusively in the enterprise space and it has recently announced its new line of business tablets.

Bottom line

Putting a 9x multiple on 2014 free cash flow per share of $3.80, yields a $34 price target. This is well warranted given the company's strengthening cash generation. It has a commitment to return at least 50% of free cash flow to shareholders. Just last quarter cash flow generated from operations was up 17% at $3 billion, and $843 million were returned to shareholders by way of dividends and share repurchases.

The net cash position improved by $1.6 billion and this is the eighth consecutive quarterly improvement of more than $1 billion. It's becoming clear that Meg Whitman is beginning to stabilize HP, with the worst potentially being behind it. The stock is still in deep value territory.

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