Ever since the appointment of Meg Whitman as Hewlett-Packard’s (HPQ) new CEO on September 22, the company has enjoyed a respectable run in its stock price – almost 30%. It seems that HP is now responding in a way that it wasn’t able to with its former embattled leader Leo Apotheker who tried (unsuccessfully) to transform HP into “the new HP” - essentially, forgetting what it does best.
Being dominant in printing and PCs was not enough. HP wanted to compete head on with Apple (AAPL) and Google (GOOG). It seems losing share to Cisco (CSCO) and Oracle (ORCL) each quarter did not pose enough of a challenge. Some CEOs continue to forget that “the new Coke” never panned out.
What’s Troubling HP?
It seems investors still do not know what to make of the company. That also appears to be the case for some analysts as well. On Friday, ahead of its earnings announcement, Sterne Agee raised its rating on the stock from Neutral to Buy and said it sees an upside price target at $34 per share as it sees uncertainty lifted and the stock as widely oversold. The firm issued the upgrade while lowering estimates, citing the company’s own revised guidance. According to Sterne Agee:
"Our sense talking to investors over the last few weeks is that expectations are that new CEO Meg Whitman will lower the bar to reset expectations. This makes sense coming in as the new CEO but also as global macroeconomic conditions remain very challenging. We have heard as low as $3.00-$4.00 in EPS. While we agree that numbers need to come down, we believe they will be better than feared, likely in the $4.30-$4.40 EPS range. We believe shares are arguably oversold trading at 5-6x CY12 EPS. We believe its multiple trading could expand to 7-8x as investors get more comfortable with HPQ's turnaround efforts.”
A Decent Quarter
Only a couple of months into her new role, investors are already seeing the difference of Meg Whitman as CEO. On Monday HP reported its Q4 2011 earnings results and what I can describe as a “decent quarter.” But more importantly, while listening to the call, it was clear that she has a firm grasp on the company and understands its weaknesses unlike her predecessor who almost sent the company into a tailspin toward irrelevance.
Diving deeper into the numbers, I have to suspect that the company is still suffering from poor execution and lack if investment spending. Some of the items included the following:
- HP reported Q4 non-GAAP net revenue of $32.3 billion, down 3% from the same quarter in 2010. The company posted non-GAAP diluted earnings per share of $1.17. Analysts expected HP to post earnings of $1.13 a share on revenue of $32.05 billion.
- Full year fiscal 2011 GAAP net revenue for the fiscal year 2011 was $127.2 billion, up 1% compared with the prior year. Non-GAAP net revenue for the full fiscal year 2011 was $127.4 billion, up 1% compared with the prior year.
- For the fourth quarter, GAAP net revenue of $32.1 billion was down 3% from the prior-year period. GAAP diluted EPS was $0.12, down 89% from the prior-year period.
- HP Software revenue grew 28% year over year, driven by revenue growth in licenses and services. Revenue in HP’s commercial businesses declined 2% year over year. Revenue in HP’s consumer businesses, within PSG and IPG, was collectively down 9% year over year.
Hewlett-Packard’s first-quarter profit forecast and full-year earnings outlook both missed analysts’ estimates. But Whitman’s blueprint for rejuvenating HP should not be underestimated. The company plans to focus heavily and inject capital into its PC division as well as its IT Services business which includes boosting research spending and limiting the size of acquisitions. This is a far stretch from the company’s previous strategy that involves neglect some of its key assets.
- Profit for the quarter ending in January will be 83 cents to 86 cents a share, excluding some items, the company said in a statement. The average estimate of analysts surveyed by Bloomberg was for $1.11 a share.
- Excluding certain items, profit will be at least $4 a share in fiscal 2012, which began Nov. 1, missing the average forecast for profit of $4.58.
I asked previously if Meg Whitman was up for the task of turning around HP. That question was clearly answered during the conference call on Monday as she more than demonstrated based upon the HPs guidance that she has a more realistic sense of the company’s challenges by making the following two statements:
- HP has a great opportunity to build on its strong hardware, software and services franchises with leading market positions, customer relationships and intellectual property.
- We need to get back to the business fundamentals in fiscal 2012, including making prudent investments in the business and driving more consistent execution.
The company is taking a new strategic direction, one that I think makes perfect sense. But investors must not make the mistake and expect an immediate turnaround. This is going to take some time to realize. I think investors would be wise to give HP the benefit of the doubt here, particularly after seeing how Cisco's restructuring was able to transform that company. As bleak as things may sound, HP is not performing all that badly and might deserve a long look.
Disclosure: I am long CSCO, ORCL, AAPL.