Seeking Alpha
Long/short equity, value, tech, chipmakers
Profile| Send Message|
( followers)  

Summary

  • HP's turnaround journey is in the right direction as testified by its results over the past quarters. CEO Meg Whitman has executed well on the restructuring plan.
  • Though HP has been successful in generating gains from a battered PC market, it is still far away from building a strong presence in smart devices segment.
  • While there are opportunities in 3D printing and cloud solutions, HP also faces threats from Lenovo and Cisco in server and cloud segments respectively.
  • HP is a sure buy because of its fundamental and technical strength. A cheap valuation at this point in time provides a good entry point.

I have come across a sea of analyses discussing the turnaround story of Hewlett-Packard (NYSE:HPQ) since the time this behemoth came under the control of CEO Meg Whitman. Meg took over the rein of a struggling HP after the Autonomy deal debacle and resolved to turnaround HP in a period of approximately 5 years. It has almost been more than 2 years and positive numbers around y-o-y growth, dividend etc. and strengthening presence of the company in core business areas already indicate a strong comeback.

Strong results

In the first quarter, HP's performance exceeded the expectations of analysts and investors. The company declared a diluted EPS of $0.90 per share on a non-GAAP basis as against the outlook of $0.82 to $0.86 per share. Though the revenue was marginally down, it delivered a sizeable cash flow of $3 billion from operations. One of HP's core segments, industry standard servers saw a revenue growth of 6% y-o-y. Overall, the company delivered reasonable results being in a turnaround phase, which shows that it is progressing in the correct direction.

The door to massive opportunities

In a recent announcement, HP confirmed its plans to enter the hitherto reserved 3D printing industry, a move that would be a big threat to the already existing players in the industry i.e. Stratasys (NASDAQ:SSYS) and 3D Systems (NYSE:DDD). While, HP has been a revolutionary brand in the 2D printing segment, developing and selling 3D printers would be a different ball game. In fact, a solid performance in the printing segment over the last year has sustained HP's image and kept the confidence of investors afloat. For Q1, the operating margin in this segment was approximately 16.8%, making it one of the high performers.

CEO Meg Whitman mentioned the company's intention to make a "big technology announcement" regarding 3D printing around June and this has stirred interest among Street analysts.

Earlier, HP had entered into a manufacturing and distribution agreement with Stratasys whereby HP sold 3D printers under its label, developed by Stratasys. Though that partnership ended in 2012, yet it is a testament of HP's robust distribution network. Hence, HP's focus should be on developing an innovative, affordable and effective range of printers.

The progress of Autonomy

A double-digit growth in Autonomy's IDOL (a meaning based platform that enables extraction of meaning from information) licence revenue and a major win with China Mobile has set the ball rolling after the over-valued deal had marred HP's reputation. The deal with China mobile will allow citizens to access public service information on the go. HP's innovation streak has helped it to launch IDOL 10 and Data Protector 8.1, first ever self-aware backup and recovery solution.

In a move to expand this platform to developers, HP is planning to break down IDOL into individual web services. This move could usher in a good number of developers who could not be a part of HP's audience because IDOL was being sold as an enterprise package.

Battling the slowdown in PC demand

Apart from the above-mentioned business areas, HP's core competency still lies in PC markets and we are already aware of the smart devices wave that has almost swept the demand for desktops. In spite of battered demand in consumer PC market, HP increased the unit shipments by 6% y-o-y due to improved demand conditions in the commercial PC markets. As a result of a sturdy performance, HP's market share is now just slightly lower than that of Lenovo (OTCPK:LNVGY), the leader in the PC market. A report from Gartner showcases the shares of enterprises that occupy this market.

As I mentioned earlier, PC demand is on a gradual decline and the numbers on the Gartner report also narrate a similar story. Identifying the trend, HP has taken the initiative to expand its presence in the smart devices market. It recently introduced two new devices in the Indian market, the HP Slate 6 and Slate 7 VoiceTab. However, it is clear that a good amount of work needs to be done by HP on smart devices in order to establish its presence in an already crowded space.

Future Outlook

One of HP's main strengths is private cloud solutions and it was recognized as a leader in the space by Forrester Research. In Q1, the Cloud saw a double-digit growth and as such, it is going to be HP's primary strategic area in the future. CEO Meg Whitman seemed highly confident about HP's offerings in the cloud space especially the hybrid cloud management platform. Going ahead, HP will focus on inorganic growth in building its cloud platform besides Security and Big Data firms.

In nutshell, HP is eyeing acquisitions in key areas like Cloud, security and data management in order to achieve growth. Though the company management has not laid out specific plans related to these acquisitions but analysts are hopeful that HP can get massive growth from these avenues.

Big Threats

Besides the headwinds in the PC market, HP would face a big threat from Lenovo once the latter completes the acquisition of IBM's server business. If this deal goes through then Lenovo's share of the server markets would jump to 14% from 2%. This will endanger HP's server business, wherein the company is progressing smoothly.

Additionally, investors should also watch out for Cisco's (NASDAQ:CSCO) plans with cloud after the company unveiled its public cloud services. Cisco has planned to spend approximately $1 billion over the next couple of years to enter the cloud computing market. This article does well in comparing the potential of Cisco and HP in this space and highlights the reasons for HP's superiority over Cisco.

Final words

While fundamentally the company appears to be in a sweet spot, the technical strength of the company is also improving. A well-planned restructuring exercise has been behind strong operating margins as the company saved approximately $2 billion in staffing costs in 2013. Besides the restructuring plan, HP has also worked on upgrading its supply chain that has resulted in disciplined cost management.

The management of HP is committed to return 50% of its cash flow to the shareholders in 2014 via dividends and share repurchases. This suggests the positive perception of the board towards future operations and confidence in company's initiatives.

An addition to points in favor of HP is the fact that in spite of trading at multi-year highs, the stock is available at a cheap valuation. Based on the earnings outlook given by the management for FY 2014 i.e. $3.50 to $3.75 per share, the share is trading at a P/E of around 10. The same multiple is given by a calculation based on free cash flow per share. This suggests that it is still a good time to make a position in the stock and participate in the future rally.

Source: The Healthy Progress Story Of Hewlett-Packard