Shares of technology giant Hewlett-Packard Company (HPQ) made an aggressive move to the upside last Thursday after announcing its second quarter results. Despite closing 3% higher on the day shares have lost 12% so far this year.
Second quarter results
Hewlett-Packard reported a 31% decrease in GAAP net income to $1.6 billion amidst a 3% decline in quarterly revenue to $30.7 billion. GAAP operating margins contracted 220 basis points to 7.2%. Earnings per share of $0.80 came in ahead of the guided range of $0.68-$0.71 but were still down 25% on the year.
"We are making progress in our multi-year effort to make HP simpler, more efficient and better for customers, employees, and shareholders," according to CEO Meg Whitman. Despite the beat this quarter there is still a lot of work to do. The company announced a restructuring plan which entails the loss of 27,000 jobs which should save between $3 and $3.5 billion per year in two years time.
Personal Systems Group
Revenues for the personal systems group came in unchanged compared to last year at $9.4 billion. Operating earnings came in at $524 million, or down 2% on the year. Operating margins were largely unchanged at 5.5%. The 5% increase in desktop revenues were offset by a 3% decline in notebook sales.
Services
The services division reported a 1% drop in revenues to $8.8 billion while operating earnings fell 27% to $997 million as margins contracted by a whopping 410 basis points to 11.3%. The small decline in revenues was due to the performance at the infrastructure technology outsourcing division.
Imaging and Printing Group
HP's printing business reported a 10% drop in revenues to $6.1 billion. Profitability at the high margin business fell 29% as margins contracted by 340 basis points to 13.2%. The supplies of ink fell by 12% on the year as business and consumers are printing less and less.
Enterprise Servers, Storage and Networking
The enterprise service, storage and networking business reported a 5% drop in revenues to $5.2 billion as profits fell by 23% to $585 million. Operating margins of the business fell to 11.2% as the standard servers and critical business systems division performed poorly.
Software
The software division reported a 22% increase in revenues to $970 million while operating profits increased a mere 9% to $172 million as operating margins fell to 17.7%. Press reports arose that Autonomy's founder Mike Lynch was shown the door. Last year August HP bought Autonomy for $11 billion, but some 20% of the employees of the division have left the company after the acquisition.
Valuation
Hewlett-Packard ended its second quarter with $8.3 billion in cash and $30.0 billion in short and long term debt for a net debt position of roughly $21.7 billion. For the first six months of 2012 the company reported revenues of $60.7 billion, down 5% on the year. GAAP net income fell from $4.9 billion to $3.1 billion, or $1.53 per diluted share. At this pace the company is on track to report about $120 billion in revenues for the entire year of 2012 and report a net profit of around $6 billion.
At today's valuation Hewlett-Packard trades at similar valuation multiples as former computer darling Dell (DELL) which also suffered from the most recent transitions in the computer industry. Other computer players such as IBM and Apple (AAPL), to a lesser degree trade at significant premium to HP's multiples.
Currently Hewlett Packard pays a $0.13 quarterly dividend for an annual dividend yield of 2.4%.
Investment Thesis
About six weeks ago I had a thorough look at the business after shares had spikes upwards towards the $25 level on the back of a positive report from research company Gartner in an article called "Whitman has to move fast". I decided to stay out and shares have lost another 10% in line with the wider market to levels around $22.
Nothing has fundamentally happened since then. While the modest beat on low expectations led to a short term rally, shares continue to trade at very depressed levels as the $11 billion acquisition of Autonomy last year appears to be very expensive in hindsight.
While shares have already lost 40% over the last twelve months I will not start buying purely on valuation motives until shares touch upon the twenty mark as nothing much has improved on the long term strategic prospects of the firm.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
