Hewlett-Packard (NYSE:HPQ) has risen phenomenally in 2014 with the stock having appreciated a strong 32% so far. Clearly, this is a reflection of the fact that HP's turnaround initiatives are being appreciated by investors. The company is doing well to transition from an old school computer giant to a new age technology company, and a look at its strategies will tell us why its uptrend can continue in the future.
New and innovative products to tap new markets
HP has launched a portfolio of products and services called Helion, which allow for a flawless and safe integration of private, public and systematically ordered cloud information at the enterprise level. Helion accounts for managed cloud and IT environments on an open and secure platform.
The company also is getting active in the servers segment by entering into a joint venture with Foxconn. Together, they will create a new line of cloud-optimized servers, especially for service providers. This partnership will help both companies manufacture products at high volumes by bringing together the high-volume design and manufacturing expertise of Foxconn with the go-to-market leadership of HP.
HP also unveiled its Shark system for SAP HANA, which offers high-speed performance in big data. This system is designed to deliver higher levels of performance and availability in memory computing at almost twice the speed of other solutions. In this sector, HP has a product known as OpenNFV, a comprehensive network function virtualization program that enables telecommunications companies to offer customers faster services at lower costs and lower risk levels. The company also is seeing good customer interest in Moonshot, with over 100 beta customers through its discovery labs and over 40 partners in the program.
HP needs to stay focused on being more agile, low cost and more customer and partner centric. While the company has already made a lot of progress on these fronts over the past two years, it still has more work to do on its structure, systems and go-to-market strategy. HP plans to accelerate these activities during the latter half of 2014 so as to enter 2015 with the right structure in place.
In order to improve the bottom line, the company expects approximately 45,000 to 50,000 people to leave under its restructuring program announced earlier in 2012. This figure is up from the previous estimate of 34,000 employees. While the company expects around 41,000 people to be leaving by the end of fiscal 2014, the rest will move out in 2015. No company likes to reduce their workforce, but Hewlett-Packard must improve its cost structure in order to improve its balance sheet.
The company believes that this program will help create additional run-rate savings of approximately $1 billion per year in fiscal 2016, which will help in further investments. The company will start benefiting from the second half of fiscal 2014, where it expects approximately $0.02 to $0.03 of incremental savings and an estimated incremental charge of approximately $500 million with an additional cash flow impact of approximately $200 million.
A deeper look at more segments
For the coming quarter, in printing, HP continues to focus on placing value added units and expanding its innovative ink, laser and graphics programs. The optimization of the workforce and reengineering of the business processes will help in both building a strong operational foundation and make space for investments to drive future growth.
Also, Hewlett-Packard's shares received a boost when Goldman Sachs upgraded its rating from "sell" to "neutral" and raised the price target upwards to $32. The firm said:
"Our Sell rating was largely based on the secular challenges facing many of HP's businesses and our view that restructuring was somewhat counterproductive following years of underinvestment by previous management regimes. Our thesis has been proven wrong as HP management has executed far more effectively than we anticipated."
Improving PC prospects
In addition, global notebook shipments are expected to grow, and this should give Hewlett-Packard's PC segment a much needed boost. Recently, Intel also reported a strong quarter thanks to the strengthening of the PC market. According to IDC, global PC shipments in the second quarter declined only by 1.7% year-over-year to 74.4 million units, marking the smallest decline since 2012.
As a result, HP's personal systems business also gained traction, even though HP faces a market contraction in this area, particularly in commercial PCs. However, the company gained share, along with good growth in Europe and Japan, on account of strong execution. HP also regained its top position in both commercial PCs and in desktops, amid a declining market.
Hence, HP is expanding its presence in both new technologies, while improvement in the PC market will also help it improve its overall results. As such, even though HP has appreciated strongly on the stock market this year, more gains cannot be ruled out.
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