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Shares of Hewlett-Packard (HPQ) ended the week 6% higher in a general market environment in which the SP500 fell some 2%.

News

Shares in the computer giant rose the most in three years time after a research report from analysis firm Gartner showed the company has expanded its market share in the global personal computer business from 16.9% last year to 17.2% at the end of the first quarter of 2012.

Investors are excited and see it as an encouraging sign that the company is getting back on its feet under the command of its new CEO Whitman after a disastrous couple of years in which first CEO Mark Hurd was forced out after allegations of sexual harassment and later his replacement Apotheker was shown the door after contemplating a possible spinning off of Hewlett-Packard's personal computer division.

Under command of Whitman the company is actually integrating the personal business and printer division of the company. Furthermore, she outlined plans to become more active in the cloud-based strategy where HP has been lagging its competitors. Investors and analysts are not impressed and call the suggested strategic changes insufficient and not transforming enough.

Valuation

Hewlett-Packard ended its latest quarter with $8.1 billion in cash and $30.9 billion in debt for a net debt positions of $22.8 billion. After this week's rally, shares are valued at some $49 billion which values the largest personal computer producer at merely 0.4 times annual revenues and 7 times annual 2011's earnings. These valuation multiples are in line with other personal computer manufacturer Dell (DELL) but it trades at a significant discount to IBM and Apple (AAPL) which focus on businesses and higher end personal computers among others respectively. The company pays a quarterly dividend of $0.13 for a dividend yield of 1.9%

Demise of its printing cash cow

Signs of strength in the personal computer business are welcomed by investors who expect a continuous decline in the printer business in the coming years. Hewlett-Packard holds a 40% market share in printers, but revenues and profit margins have been falling as fat-margin products like ink cartridges are no longer being purchased by a new generation.

Merging the printer division with the personal computers division could hide the extent of the decline. The "lifeblood" of HP, as Whitman called the division, is the cash cow behind the company and is hit hard by competition from Apple and Facebook which allows users to make more photo's with the iPhone and store them on Facebook which works as a lifetime album of pictures. A whole generation of young people is no longer printing their pictures, a development which led to the bankruptcy of Eastman Kodak (EKDKQ.PK) already earlier this year.

Will the personal computer business go down as well?

Hewlett-Packard, which once was a technological leader is lagging and it is impacting not just the traditional printing business. Increased functionalities of smart phones and tablets could cannibalize the use of personal computers in the near future with young people solely working on laptops. The company has to quickly pick up innovation and get involved in this new area because otherwise it will end up being a low cost producer of simple laptops competing with Chinese firms at low margins in the very near future.

Innovative companies like Apple with its range of products and Amazon (AMZN) have cannibalized entire companies already like Nokia (NYSE:NOK), Research in Motion (RIMM), BestBuy (BBY) and Barnes & Noble (BKS) as they transformed the technology, retail and book publishing industry already.

Investment Thesis

Shares in Hewlett-Packard have fallen over 50% after reaching recent highs of low fifties in the spring of 2010. Shares have fallen to lows of $23 with shares trading around the $25 mark at the moment.

Purely on a valuation basis shares are very cheap as investors expect business conditions to continue to deteriorate in the near future. Consequently, positive news flow like the report of Gartner, which was not anticipated, is seen as a very bullish sign by some investors.

Unless Whitman is going to unveil a more dramatic strategy shift than merely a combination of the printer and personal computer business, I will stay out.

Source: Hewlett-Packard: Whitman Has To Move Fast