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  • HP: Lots Of Challenges Ahead Yet Lots Of Value In The Stock 0 comments
    Aug 10, 2012 12:25 PM | about stocks: AAPL, ARMH, CSCO, DVMT, IBM, ORCL, HPQ

    Hewlett-Packard, (NYSE:HPQ) the troubled tech giant, has some serious challenges ahead of itself. These include declining printer sales, enterprises downsizing their services, execution issues and PC profits coming under pressure. New CEO Meg Whitman took some much-needed strategic initiatives to revitalize the company. Last few days' move in the shares of the company suggests that finally the shares may have bottomed out.

    HP's revenue and margin performance was better than expected in the fiscal second quarter, 2012. This better performance came from the PC business, where revenue was basically flat last year. Printing was quite weak (down 10%), while services was a bit soft (down 1%) and ESSN (Enterprise Servers, Storage and Networking) was down 6%. Second quarter revenue fell 3% from last year, but rose 3% sequentially and beat most estimates by around $1 billion. (For more information click here.)

    New CEO Meg Whitman Making Smart Moves

    Whitman took the bold step of merging HP's PC and printer divisions. She also opted to open source the much acclaimed webOS operating system and oversaw HP's support for ARM's (NASDAQ:ARMH) low-power chips. She decided in May to cut 27,000 jobs, or 8% of the company's total workforce.

    UBS analyst Steven Milunovich acknowledges that Whitman is "making smart moves" such as centralizing the firm's strategy, sales and marketing, but warns that this may not be enough to succeed. UBS initiated coverage on HP with $16 price target on Tuesday this week.

    "We question whether HP is 'better together' and that it might be 'smart to be apart,' specifically spinning off printers and PCs," he explained, in a note released this week. "HP lacks the pure enterprise focus of IBM (NYSE:IBM) and EMC (EMC) yet will have trouble competing for consumers without strong tablet and phone businesses like Apple (NASDAQ:AAPL) and Samsung."

    (Source: Barron's)

    Negatives Discounted in HP Stock Price

    Shift to Software Development is Positive: The $11 billion purchase of software firm Autonomy has driven HP's net debt burden to $21 billion as of April. But the company's software revenue grew 22% year over year with a 17.7% operating margin, including the results of Autonomy. Software revenue was driven by 7% license growth, 17% support growth, and 72% growth in services. To help improve Autonomy's performance, Bill Veghte, HP's chief strategy officer and executive vice president of HP Software, will step in to lead Autonomy. HP's shift towards IT should eventually be EPS accretive, much like IBM and Cisco (NASDAQ:CSCO).

    Restructuring Initiative Seems Successful: The company is in the midst of a major restructuring process and gross margin improved in second quarter by nearly a point from the first quarter, while falling about a point and a half from last year. Reported GAAP operating income and adjusted operating income performance were directionally similar - both declined from last year by more than 20%, while showing a single digit sequential increase.

    (Source: HP)

    Stock Closed Above 20-Day SMA and Headed Towards 50-Day SMA

    (click to enlarge)

    The downtrend that started in 2011 in the stock of HP may have finally ended. The last few days' move in the stock from $17.41 to $19.75 indicates that the stock may have bottomed out. This is partially confirmed by the fact that the stock closed above the 20-Day SMA at $18.53 on Monday. A final confirmation will come when HP will start to trade above the $19.88 mark, the 50-Day SMA. The RSI and MACD indicators are signaling bullish move ahead.

    Last Friday the stock rallied 4.05% before closing at $18.26 backed by the news that the company wins ruling against oracle over Itanium server support. Again on Monday the stock rallied 2.35% and closed decisively above the 20-Day SMA. According to the news Oracle Corp. (NASDAQ:ORCL) is contractually obligated to continue developing software for Hewlett-Packard's Itanium-based servers, a California judge ruled.

    Conclusion: Stock Trading in the Deep Value Zone

    The company bought back $10 billion of shares in the fiscal year that ended last October. HP still pays a hefty 2.92% dividend to its shareholders. With an estimated PE multiple of as low as 4.45 for 2012 and an estimated PEG ratio of 1.05, the valuation of the $34,823 million market cap company looks certainly cheap.

    HP scores 80% in the Cornerstone Value strategy of selecting value stocks. Last week the stock traded very close to the price of $16 that has been set as the target price of HP by UBS. Maybe the worst is over for the HP stock.

    Disclosure: I am long HPQ.

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