Don't Give Up On Hewlett-Packard

| About: HP Inc. (HPQ)

Hewlett-Packard (NYSE:HPQ) has been in the media a lot the past decade as a blue print for exactly how not to run a board room. Despite all of the negative press, HP has actually done very well. Revenue per share nearly tripled in the last decade. Earnings per share growth has not been smooth, but it has been impressive.

Former CEO Mark Hurd is credited with turning the company around from 2005 to 2010. He was able to turn around the company because HP is a great company with great businesses. A combination of great businesses and great management leads to great results. A combination of great businesses and poor management leads to poor results.

Fiscal Year Earnings Per Share Sales Per Share
2003 0.83 24.01
2004 1.15 27.45
2005 0.82 30.56
2006 2.18 33.55
2007 2.68 40.42
2008 3.25 49.01
2009 3.14 48.44
2010 3.69 57.18
2011 3.32 63.91
2012 Est. 4 67.55
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HP has a great new CEO in Meg Whitman but she faces a real challenge-keeping the PC business growing. To many people the PC business is the face of HP, even though the PC business accounts for only 13% of HPs operating earnings. The PC business does, however, make up 32% of its revenue. With the phenomenal surge in tablet computers the past few years, it is no surprise the PC business is struggling. HP made a very poor and half-hearted attempt to enter the tablet market, before embarrassingly leaving it after a few months of poor results. HP is already working on a new tablet using Windows 8. The tablet will help the PC division grow revenue in the future, but this highly competitive market will likely have thin margins.

The other two lines of business not doing well at HP are its high-margin Imaging (i.e. printing) business and its Enterprise, Storage, and Networking business. Software, Financial Services, and Tech Services account for 43% of earnings and are doing well.

HP expects EPS of $4.00 for 2012. At a price of $26 a share and a p/e of 6.5, the challenges HP faces are priced into the stock.

Since 2004 HP has bought back 1 billion shares and it plans to continue to buy back shares at a steady pace. At the current share price buybacks make a lot of sense. Another way it needs to use free cash flow is to reduce its $22.5 billion in debt because the huge debt burden will make future acquisitions difficult.

Despite the challenges, HP is great company with great employees. Meg Whitman is a brilliant CEO with a lot of business sense. HP also has some very strong and growing lines of business. HP will not turn around over night, but could be a great buy over the next 3 to 5 years.

Disclosure: I am long HPQ.