Take Advantage Of Overreaction To HP's Numbers

| About: HP Inc. (HPQ)

There's something to be said about Wall Street's less than favorable reaction to the numbers that tech giant Hewlett-Packard (NYSE:HPQ) recently delivered. I say this because it appears that many analysts had soon forgotten that expectations for the company were already low, considering the fact that it has only been months since its new CEO, Meg Whitman, had taken over.

The stock has declined since the earnings announcement, as it seems that some investors have opted for greener pastures while HP continues to work to get its house in order - one of these has to be a way to figure out how to compete effectively with Apple's (NASDAQ:AAPL) tablets and devices surge. But right or wrong is immaterial - this is the reality that Hewlett-Packard faces and one that it has to deal with. The question is, can it?

2012's Unassuming Start

Analysts were not impressed. Last week, the company reported net income of $1.47 billion, or 73 cents per share, in the three months that ended January 31. This didn't compare too well with its net income of $2.6 billion or $1.17 per share in the year ago period. Adjusted for one-time items, the company earned 92 cents per share, above the 87 cents expected by analysts surveyed by FactSet. Revenue was $30 billion, down from $32.3 billion and slightly below expectations of $30.7 billion.

The revenue drop was even steeper, 8 percent, when taking out the effect of changes in currency exchange rates. It was the fastest revenue decline for the company since the recession hit 2009 results. As with Dell and Microsoft (NASDAQ:MSFT), HP blamed flooding in Thailand for more than half of its revenue drop. The floods last year disrupted manufacturing of storage drives, a key component in PCs. HP said it decided to divert resources to higher-margin products, but it didn't do as well as it expected due to ongoing operational problems.

As I have said before, as its PC business continues to show considerable signs of weakness, I think the company should seriously focus its attention on services to model the mode of IBM (NYSE:IBM) as well as Dell (NASDAQ:DELL). On the positive front, I continue to be optimistic with the company's servers, storage and networking businesses. It shows that it can continue to compete effectively with names such as EMC (EMC) as well as Cisco (NASDAQ:CSCO) in the segments respectively. Printing and imaging also continue to show positive signs as it continues to dominate both Lexmark (NYSE:LXK) as well as Xerox (NYSE:XRX).

While the numbers were not great, they were far from a disaster with all things considered. Only a couple of months into her new role, investors are already seeing the difference that Meg Whitman is able to make as CEO. While listening to the call, it was clear that she had established a firm grasp on the company and understands its weaknesses unlike her predecessor. Admittedly, there are some glaring problems, but they are also correctable.

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 neglecting some of its key assets.

Moving Forward

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 Wednesday, as she more than demonstrated, based upon HP's guidance, that she has a more realistic sense of the company's challenges and what it will take to get them fixed. Recently, an analyst from 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.

It seems to me that Whitman appreciates what the company is and what it is not whereas Apotheker wanted to kill off the company's PC business to compete head on with Apple in tablets and sought to outperform Oracle (NASDAQ:ORCL) in services - both of which failed miserably. In other words, dominating the PC market from Dell and securing printing away from competitors such as Lexmark was not enough and I suspect was perceived boring. All of this, while ignoring the fact that it was also losing market share to Cisco in its networking business. And this is where Whitman has restored some stability, direction and focus as evidenced by what the company has been able to do in a relatively short period of time under her tenure.

Summary

As bad as things once looked for this company with its indecision regarding its PCs and tablet initiatives, investors should be comfortable in its new leadership yet appreciate that the old HP might be coming back. I continue to remain bullish on the company and think that there is yet 20 percent upside to be had for value investors. The company is taking a new strategic direction - one that I think makes perfect sense. But investors must not make the mistake of expecting an immediate turnaround. This is going to take some time to realize.

Disclosure: I am long AAPL, MSFT, ORCL.