Hewlett-Packard's Focus On Tablet Market And Restructuring Efforts Make It A Buy

| About: HP Inc. (HPQ)

The management at Hewlett-Packard (NYSE:HPQ) has decided to go for restructuring in order to sustain its competitive position. The 10% downturn in personal computer sales over the last one year has forced the company to try and fight on new frontiers. The change in focus towards the growing tablet market will enable the company to substantially increase its revenue. Its recent acquisitions of Autonomy Corporation and Hiflex Software GmbH have increased its revenue from its software segment by 18%. Moreover, the management's decision to lay off 11,500 employees by the end of FY2012 will result in decreased costs. The stock is trading at P/S of 0.31x, at a significant discount when compared to its peers in the industry. Our 12-month target price is $53.4, with an upside of 34%.

HP suffered a considerable loss of $8.9 billion in the last quarter, primarily due to the drastic decrease in computer sales, the economic turmoil in Europe and slow growth in China. Being the largest computer manufacturer, HP has registered a decline of 5% in revenues, which stand at $29.7 billion, below Wall Street's expectations of $30.1 billion, according to Thomson Reuters. Nevertheless, we can see significant cost cutting in the future, as HP Chief financial Officer Cathie Lesjak said, "HP will cut 11,500 jobs by the end of FY2012." The company has already reduced 4,000 jobs and is trying to bring efficiency in its operations so that it can enjoy a cost advantage.

HP is trying to shift its focus towards media tablets by establishing mobility business units. According to one of the company memos, this endeavor will be headed by Alberto Torres, the former operational head of Nokia (NYSE:NOK). The company has significant potential to capture this growing market with its strong brand equity. The company's robust supply chain network and its position as the third largest buyer of semiconductors portray its capabilities to gain a competitive edge in the tablet market. HP should be heavily credited for still leading in a number of important markets while trading at a cheap P/E ratio of around 7x. The trend in the industry is that shareholders are not satisfied and are willing to sell the stock at any price.

One of its main competitors, Dell (NASDAQ:DELL), has also witnessed a net loss of $4.49 per share in last quarter's earnings results, as compared to a profit of 93 cents per share last year. These companies were badly hit because of strong competition in the industry. HP, a market leader in PC manufacturing, has witnessed a dip in revenues from all business units, primarily because of an unexpected decline of 10% in the personal computer division.

Along with organic growth, Hewlett-Packard believes in expansion through inorganic growth. Its recent acquisition of Autonomy Corporation enables it to build a strong bond with corporate clients with highly efficient business software. This acquisition has strengthened HP's position in the rapidly growing Information Management System Industry. Moreover, the acquisition of Hiflex Software GmbH had helped the company enhance the sales leads of its IPG (Imaging and Printing Group) segment.

The company's net revenue has decreased from $31.2 billion in 3Q2011 to $29.7 billion in 3Q2012. This decrease mainly came from revenue declines of 10% and 3% in the Personal Systems Group (NYSE:PSG) and Imaging and Printing Group respectively. The drastic decrease of 568% in net earnings depicts the company's restructuring charges and the impairment of its goodwill to revitalize its brand image recognition. After eliminating one-time line items, the decrease is only 32%. HP's YoY revenue growth rate of -3% is slightly higher than Dell's -4%. The company's gross margin and operating margin are 1% higher than Dells, which represents the former's strong position as compared to the latter. The company has secured some rigorous outside financing, resulting in a debt to equity ratio of 94% as compared to the industry average of 49%. Although this outside financing has provided capital, it has also resulted in increasing future expenses due to the increasing interest payments.

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HPQ is currently trading at its 52-week lows and has a significant potential to bounce back. As we see from the graph above, the stock is down 12% in last 6 months. The same bearish trend has been followed by DELL, which is down 23% because of declining computer sales. Both these companies also suffer because of cost leadership strategies of ACER (OTC:ASIYF) and Lenovo (OTCPK:LNVGF). Looking forward, we can see a bullish trend with the prudent management decision of organizational change and business restructuring.


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Our 12-month target price is $53.4, with an upside of 34%, as per the average P/E of the last five years multiplied with next year's earnings. Positive future prospects are prominent in the company's business restructuring towards the tablet market, and the revamping of the EDS business. This price reflects the company's turnaround strategy with regards to its competitive edge through its supply chain network and the economies of scale on purchases of semiconductors.

HPQ is trading at P/S of 0.3x, at a significant discount as compared to its peers in the industry. However, it is trading at P/E of 7.7x, at a slight premium when compared to DELL, and at a considerable discount when compared to Accenture and International Business Machines . The forward P/E of HP is 4x as compared to Dell's 6x. Hewlett-Packard's decision to move into the media tablet market will substantially increase its revenues and maintain its competitive position. Furthermore, the markets of Eastern Europe and Japan are providing immense future growth prospects, which the company should enjoy.


The management's recent decision to restructure shows strong future growth prospects. The company's shift towards the tablet market is portraying its responsiveness towards the dynamic technological environment. The shift in focus also depicts the company's growth philosophy to sustain its competitive advantage despite the hit taken by the PC business. Moreover, HP CEO Meg Whitman plans for small divestitures to put focus on narrow product lines. Despite declining sales in slowing economies like Western Europe and China, HP has the opportunity to tap brighter Asian markets.

According to the CEO, the company revamped its EDS business unit to bring more information technology efficiency for corporate clients. EDS provides a wide range of IT solutions and outsourcing services to different types of businesses. The revenue from the software business has grown by 22% over the last year, and has substantial potential to increase further. According to analysts, the earnings growth rate for 2013 is 25%. Furthermore, the company plans to increase its research and development expenditure to enhance innovation, with which the new CRM system will further help the company improve its sales. In the company's recent conference call, CEO Whitman talked about organizational changes that will bring efficiency in business operations and enable HP to cope with restructuring.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The article has been written by Qineqt's Technology Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.