Why You Should Trust HP's Comeback Efforts And Be A Part Of Its Growth

| About: HP Inc. (HPQ)


CEO Meg Whitman has successfully kept HP on course with its turnaround efforts. Even though Q2 results missed Street expectations by a whisker, investors have not lost confidence in HP.

Personal systems and printing were the primary drivers of growth in Q2. HP is attempting to boost the demand of notebooks to compensate for sluggish demand in commercial desktops.

HP has managed to create a comfortable cash cushion for itself via strategic cost cutting initiatives. Also, it has been consistent in generating valuable returns for its shareholders.

The shares of Hewlett-Packard (HPQ) have risen approximately 34% over last one year and have approximately tripled from the lows of late 2012 under the stewardship of CEO Meg Whitman, who is driving HP on a well-structured path in order to create a concrete comeback. The share price saw a favorable movement after Goldman Sachs upgraded the rating for the stock from "sell" to "neutral" while admitting the fact that the "bear case was wrong."

Though the Q2 earnings reported on May 22nd failed to meet the Street expectations by a whisker, the company did not see high volatility on the exchange.

For the second quarter of 2014, non-GAAP diluted net earnings per share came in at $0.88, up 1% from the prior-year period, versus the previously provided outlook of $0.85 to $0.89 per share. Second quarter GAAP diluted net earnings per share stood at $0.66, up 20% from the prior-year period. Net revenues slid a percent on a year-over-year basis to $27.3 billion whereas the investors and analysts were expecting a revenue to the tune of $27.41 billion. Cash flow from operations stood at $3 billion and the company returned colossal amounts to shareholders via dividends and share repurchases, i.e. approximately $1.1 billion.

Personal systems unit is coming up

Nearly all of HP's major product departments saw revenue drop on year-over-year basis, with few exceptions and one sweet exception was the growth of around 7% in the personal systems unit. The slowdown in demand for commercial PCs continued in the quarter but the company was still able to extract gains from sale of commercial PCs essentially because of the migration of users from Windows XP OS.

Besides growth in commercial desktops, HP also did reasonably well in the notebooks segment. Recently, the company unveiled its new age laptop SlateBook that runs on Android in order to pull in the technology driven "millenials." Though the response to this innovative effort is yet to be gauged but the takeaway is clear that HP is eyeing considerable growth in sales of notebooks in order to compensate for the contracting demand in its desktops business. Though consumer sales in notebooks was down by 2%, consumer notebook revenue grew slightly for the first time since the fiscal 2010 third quarter.

Besides growth in notebooks section, HP is also investing credible efforts in its smart devices products. The company recently added HP Slate 7 Plus', a business tablet that can be bought from HP's US website for just $150. This is a laudable addition to its existing smart devices portfolio consisting of HP Slate 6 and Slate 7 tablet devices, which were released in India a few months back.

Printing: A safe harbor

As reported in the earnings call, the printing business of the company once again outperformed the market and saw unit placement growth for the fourth consecutive quarter. The absolute printing revenue was $5.8 billion, down 4% year-over-year, driven by a decline in supplies revenues, primarily related to lower toner sales.

The printing business of HP is a resilient unit that has provided safe harbor to the company during times of distress and for this quarter the performance of the company was helped by better churn in the demand for Ink advantage printers and better traction for initiatives including Ink in the office. The company is poised to enter the 3D printing markets in late 2014 and this could prove to be a turning point in company's comeback efforts as HP already enjoys a strong distribution network owing to its established presence in 2D printers market.

Though the prospects of 3D printing industry are not quite certain yet, HP's foray into this sector could bring healthy gains. However, stalwarts like Stratasys (SSYS) and 3D Systems (DDD) might not have much to worry about as the company plans to enter the business 3D printing area and stay away from consumer 3D printing for now.

Final words

One of the efforts that has helped the company to be on track with its turnaround plan is massive and strategic cost cutting. The company has shed off approximately 33,000 employees since Meg Whitman took charge in 2011 and is planning more layoffs after it missed the Street estimates in the second quarter. As a consequence of the cost management initiatives, HP has been able to build a viable cash position for itself over the last few quarters. As mentioned above, the company managed to generate $3 billion in cash from operations in the quarter and also paid a dividend of $0.16 per share, which translates to a total cash usage of $0.31 billion. Mathematically, it implies that HP consumed just 10% of its cash in order to give valuable returns to shareholders in the form of dividends.

Since the beginning of the year, HP's stock price has gained 20.4% essentially because investors are optimistic of healthy implementation of decided strategies. Besides that, it has been quite a value creator, a factor that highly appeals to dividend oriented shareholders. To sum it up, HP might have had a slightly bad second quarter but that definitely does not cast a doubt about the robust fundamentals of the company. Hence, it is an ideal candidate for your portfolio.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.