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Summary

  • HP is stable, the focus is on growing revenues in the future.
  • Results reveal that the PC is not dead.
  • To offset lack of top-line growth, Whitman resorts to even more job cuts while keeping R&D intact.
  • Shares are appealing on dips.

Hewlett-Packard (NYSE:HPQ) released a mixed set of second-quarter results. Revenues fell a bit short, while cost saving efforts allowed the company to deliver on the bottom line.

Based on the strong cash flows, focus on shareholder returns, innovation and revenue growth, I give shares the benefit of the doubt on dips.

Second Quarter Highlights

HP reported second-quarter revenues of $27.31 billion which is down by 1.0% compared to last year. Despite the modest fall in revenues, net earnings were up to $1.27 billion.

Thanks to modest share repurchases earnings per share growth was more impressive with earnings advancing by 20% to $0.66 per diluted share.

Non-GAAP earnings came in a penny higher at $0.88 per share, being in line with the company's own guidance for earnings of $0.85 to $0.89 per share.

Looking Through The Divisions

There have not been huge surprises between the divisions, although it appears the PC is not dead.

Personal systems reported a 7% increase in revenues to $8.2 billion driven by strength in notebooks, desktops and workstations. Notably the commercial market was strong with weakness seen in the consumer market. Revenue growth was accompanied by a modest jump in operating margins which improved by 30 basis points to 3.5% of sales.

The printing business reported a 4% drop in revenues towards $5.8 billion, mainly driven by weakness in supplies revenues which were down by 6% to $3.9 billion. Despite the pressure on top-line results, HP managed to again improve operating margins significantly. Margins rose by 3.6% to 19.5% of total sales.

Enterprise group revenues were down by 2% to $6.7 billion due to weakness at technology services and storage. Margins fell by 140 basis points to 14.4% of sales.

Enterprise service revenues were under pressure, coming in 7% lower to $5.7 billion due to weakness in both the infrastructure technology and application, as well as the business service activities. The company managed to maintain its margins, although they came in at just 2.5%.

HP's smaller and more promising future businesses delivered rather weak results with software revenues being flat just in terms of revenues, coming in just under a billion. Margins of the business improved slightly, increasing by 60 basis points to 19.2% of sales.

The only reason why net earnings rose was due to lower restructuring and amortization charges. These costs came in at $516 million for the past quarter, down from $758 million in costs taken last year.

Looking Into The Rest Of The Year

HP foresees non-GAAP earnings of $0.86 to $0.90 per share in the coming third quarter, with GAAP earnings seen at $0.59 to $0.63 per share. Analysts were looking for non-GAAP earnings of $0.90 per share.

For the full year, non-GAAP earnings are seen between $3.63 and $3.75 per share, resulting in GAAP earnings between $2.68 and $2.80 per share.

Valuing HP

HP ended the quarter with $15.1 billion in cash and equivalents. Debt is still considerable and with $22.6 billion in debt, this results in a net debt position of $7.5 billion.

Trading around $32 per share, HP's equity is valued at little over $60 billion. This values the equity in the business at little over 0.5 times expected revenues of $112 billion. With earnings anticipated to come in around $5.2-$5.3 billion, HP is valued at 11-12 times annual earnings.

The company's $0.16 per share quarterly dividend provides investors with a 2.0% dividend yield.

Bolstering The Balance Sheet, While Pleasing Investors

Recently HP hiked its dividend, now providing investors with a 2.0% dividend yield. The company furthermore spent $831 million during the quarter to repurchase nearly 27 million shares at a rate of 5.5% per annum.

Despite these payouts to its investors, HP managed to improve the net cash position by a billion which marks the ninth quarter in a row in which the company has reduced its net debt position by a billion or more. HP is targeting to operate with a flat net cash position.

To continue to drive results and cash flows, HP is cutting more jobs. In May of 2012, HP estimated that 34,000 jobs would be lost in its restructuring efforts. Right now, the company expects to eliminate another 11,000 to 16,000 jobs. This would bring total job cuts under Whitman's command to 50,000, up from an original estimate of 27,000. The latest round of job cuts would have to result in incremental savings of a billion by 2016.

Takeaway For Investors

Whitman believes HP is stabilized at the moment and the company is on the right track, taking out more costs while investing in R&D staff.

New innovations and growth areas are needed. While personal computer sales were strong during the quarter, the company expects the market for PCs to continue to shrink in the coming three years while the company aims to gain market share.

Besides the continued headache of PC sales, HP is also facing pressure on business which shift their data needs from HP servers to rent-based cloud networks. While Whitman stresses the focus on innovation, these efforts still have to pay off. Potential growth businesses like the software business report revenues of under a billion and show a lack of growth at the moment.

HP is fairly valued at 11-12 times earnings as the balance sheet improves rapidly while revenue growth is stabilizing. To provide a further boost to the prospects and the valuation, signs of revenue growth have to emerge later this year.

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.

Source: Hewlett-Packard - Company Is Stabilized As Whitman Resorts To Job Cuts Again