4 Solid Reasons Why You Shouldn't Miss Hewlett-Packard's Turnaround

Jun.27.14 | About: HP Inc. (HPQ)


Hewlett-Packard's turnaround is progressing at a rapid pace as the company is focused on reducing costs and is focusing on growth areas.

HP's move into servers and the cloud should lead to strong long-term growth.

HP is trying to become a new age technology company by trying to cash in on emerging trends.

Finally, HP's valuation is also attractive, making the stock a solid long-term bet.

Hewlett-Packard's (NYSE:HPQ) turnaround is progressing at a remarkable pace. The market seems to have recognized Hewlett-Packard's efforts, and this might be the reason why the stock has gained an impressive 20% so far this year. HP is successfully executing its turnaround, and some of its businesses are performing better than expected. In addition, the company has made significant progress in putting the systems and structures in place to more effectively manage the business. So, HP seems to have paved the way for solid growth in the long run.

Smart strategies and investments

More importantly, HP has stabilized its top line and has started to see benefits of its focus on investments in key technologies. Management is working to improve the consistency of its execution and bring down the cost structure to drive overall profitability. HP looks well-positioned to enter the second half of 2014, driven by its focus on sustained profitable revenue growth.

HP's turnaround is driven by innovation. It has launched several innovative products to sustain its momentum. For cloud applications, it has launched HP Helion, which is a portfolio of products and services that will accelerate its enterprise business. Helion is capable of integrating public, private, managed cloud and traditional IT environments on an open and secure platform.

To benefit from the cloud, HP made a massive investment of $1 billion in OpenStack recently. As reported by eWeek:

"Hewlett-Packard is reaffirming its strong commitment to the open-source OpenStack cloud platform today, with a $1 billion, two-year investment in research and development and a new Helion cloud platform initiative.

Helion is the new brand name for HP's OpenStack efforts and includes a full OpenStack distribution that will have both community and commercial editions. Additionally, HP is building its own platform-as-a-service technology, dubbed the Helion Developer Platform, that is based on the open-source Cloud Foundry platform. Rounding out HP's Helion initiatives are professional services to help enterprises get up and running with the cloud as well as a legal indemnification program."

Targeting servers and cloud

HP has entered into a joint venture with Foxconn and has announced further innovations in the business model to improve its server business. This joint venture is helping HP create a new line of cloud-optimized servers, mainly targeted at service providers.

The partnership combines the high volume design and manufacturing expertise of Foxconn with the computing services brand and go-to-market leadership of HP. Together, the two companies plans to redefine the infrastructure economics of the world's largest service providers. For big data, the company has rolled out the HP Shark system for SAP (NYSE:SAP) HANA, which is designed to deliver higher levels of performance and availability for in-memory computing, equivalent to twice the speed of other solutions.

The tie-up with SAP is a positive for HP as it witnessed robust sequential growth in its HANA offerings in the second quarter, and introduced OpenNFV, which is a comprehensive network function virtualization program. The new program is fabricated to help telecom customers launch new services at a faster rate, and reduce cost and risk.

Focus on key market trends

According to HP management, there's a massive shift in the way customers buy, pay for, and consume technology, creating opportunities and challenges for HP. In order to counter the challenges, the company is focusing on making its processes more agile, lower cost in nature, and more customer and partner centric.

In addition, HP is seeing robust performances from its printing, networking, and personal systems businesses. It is focused on disciplined cost management across all of its businesses. Moreover, the company has executed impressively in its commercial PC segment.

Going forward, HP has a strong product line-up and it remains focused on profitable growth, while also progressing on its end-to-end cost structure. Management is seeing opportunity in a competitive market in enterprise infrastructure, and remains quite confident of delivering growth in this business.

The company has made good progress in the enterprise market. For example, it is seeing increasing interest in its Moonshot servers, with over 100 beta customers and engagements through HP's discovery labs, and over 40 partners in the program. Moonshot is expected to become a disruptive product in a new category of servers, placing HP in a solid position.

Moreover, HP remains confident about its storage business, and has invested in additional storage sale specialists. Its converged storage portfolio is believed to be well positioned to address shifting market forces with products like 3PAR, Store Virtual, and Store Once. Going ahead, HP plans to continue its transition to software-as-a-service and ramp its core portfolio, along with investing in operational improvements across the business.

The valuation looks impressive

Hewlett-Packard's trailing P/E and forward P/E ratios stand at 12 and 8.6, respectively, indicating the company's successful cost cutting efforts and improvement in operations. In addition, HP generates strong cash flow. In the last twelve months, HP has generated operating cash flow of $11.48 billion, while free cash flow is also quite strong at $8.16 billion.

In addition, its earnings are expected to grow at a rapid pace. Its earnings CAGR for the next five years is impressive at 4.57%, which is remarkable as HP's bottom line had shrunk at the rate of 3.78% in the last five years. So, investors should continue betting on HP's turnaround as the stock can soar to new highs.

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.