Hewlett Packard (HPQ) will report earnings after the market closes on Monday, November 21. Analysts expect adjusted earnings of $1.13/share on revenue just over $32 billion. Those figures each represent declines from last year.
Despite the company's disappointing performance this year, investor expectations have probably come down to a reasonable level. Furthermore, HP rival Dell (DELL) managed to produce an EPS beat this week, although it missed revenue targets. Thus, I expect HP to deliver results roughly in-line with the market's expectations, although I would not be surprised by a lower revenue figure.
HP has endured a tumultuous quarter (and year). On August 18, the company reported worse than expected earnings, along with weak guidance (for the third consecutive quarter), an agreement to purchase British software company Autonomy for more than $10 billion, and a further announcement that the company was considering a sale or spinoff of its Personal Systems Group (PSG). The market reacted very poorly to this news.
Then, on September 22, the company fired CEO Leo Apotheker and replaced him with Meg Whitman, who previously led eBay (EBAY) to prominence as CEO there. Finally, on October 27, HP announced that it had abandoned its plan to spin off PSG, largely because the company would have lost synergies related to bulk purchasing of components, thus significantly increasing costs.
In light of these major developments at HP, much of this year's stock slide can be explained by investors' anxiety about the company's lack of a clear strategy. (HPQ closed at $27.29 on Thursday, down nearly 45% from its 52-week high reached in February; data from Yahoo Finance). Analysts immediately worried that Whitman was following the same unpopular strategy touted by her predecessor. Then, when Whitman announced that HP would keep the PSG unit, some commentators, like this SA contributor, slammed the decision and claimed that the company had "no strategy."
This is the wrong way of looking at things.
Frustrated HP analysts and investors seem to think it is impossible for HP to be good at selling PCs, printers, servers, software, and services. According to this line of reasoning, simply by failing to specialize in one or two things, the company reveals a lack of strategy. By this standard, Berkshire Hathaway (BRK.A) has no strategy. Why would an insurance company also own retail stores, apparel manufacturers, railroads, and a host of other unrelated businesses? Yet this "strategy" has worked very well for Warren Buffett! Instead, I would suggest that Meg Whitman (while certainly not a leader of Buffett's caliber) is following a very simple winning strategy: invest in profitable businesses, and be stingy about using capital for massive acquisitions, massive share repurchases, etc. Her initial statement on capital allocation (see p. 4 of the transcript) is completely consistent with this idea.
One last note: Most proponents of the PSG sale or spinoff plan compared the move to IBM's (IBM) sale of its PC division to Lenovo in 2004. These people conveniently forget that whereas HP's industry-leading PC division is quite profitable, IBM's PC division had lost nearly $1 billion over the 3 and a half years prior to the sale. In short, the logic of the IBM PC sale does not apply to HP.
Over the next few years, HP shareholders will likely be rewarded by significant share price gains as HP stabilizes its businesses, increases sales of higher-margin service and software products, and rebuilds its balance sheet. Given the company's adjusted P/E ratio under 6, I rate HP a buy. I would suggest opening only a small position prior to earnings, and then scaling into a larger position after investors have a chance to digest the earnings report and conference call.
Disclosure: I am long HPQ.