Hewlett-Packard - Whitman's Revenue Surprise Sparks Potential For 2014 Growth

| About: HP Inc. (HPQ)
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Investors in Hewlett-Packard (NYSE:HPQ) are jumping up following its fourth quarter earnings released on Tuesday after the market close.

The strong revenue trends combined with the reiteration of the guidance for 2014 provides investors with comfort as investors were anticipating further weakness following bearish statements from some of HP's competitors.

Despite the challenging long term trends within HP's key markets, the appeal remains with an improving balance sheet, appealing earnings ratio and continued sense of urgency.

Fourth Quarter Results

Hewlett-Packard generated third quarter revenues of $29.13 billion, down 2.8% on the year before. Revenues comfortably beat consensus estimates at $27.9 billion.

The company posted GAAP earnings of $1.41 billion which compares to a large $6.85 billion loss last year, the result of huge impairments on goodwill and other intangible assets, totaling $8.85 billion.

GAAP earnings came in at $0.73 per share. On a non-GAAP basis, earnings came in at $1.01 per share which is down 13% on the year before. Analysts were looking for earnings of $1.00 per share.

The discrepancy between GAAP and non-GAAP earnings was due to $545 million in restructuring, amortization and acquisition-related charges.

CEO Meg Whitman commented on the quarterly performance, "Though improved execution, strong cost management, and with the support of our customers and partners, HP ended fiscal 2013 on a high note.Our Q4 results demonstrate that HP's turnaround remains on track heading into fiscal 2014."

Looking Into The Results

While Hewlett-Packard's revenue fall is hardly good news, revenues inched up by 7.0% compared to the third quarter. The slowdown on the year before is mostly driven by unfavorable currency movements. In constant currencies, revenues were down by just 1%.

HP continues to see some weakness in its enterprise services and software business were revenues were down by 9.3% and 9.1%, respectively. The fall in revenues for personal systems and printing business was limited at 1.7% and 0.6%, respectively. The only growth was seen at the enterprise group business, with revenues up by 1.8%.

Despite the cautious reasons for optimism, the performance is not great yet. Gross margins fell by 120 basis points to just 23.0% of total sales. Selling, general and administrative expenses rose by 70 basis points to 11.5% of total sales.

The underlying picture in terms of earnings only improved as a result of the slash back in research & development efforts and lower interest charges.

Looking Into 2014

For the first quarter of 2014, Hewlett-Packard sees non-GAAP earnings of $0.82 to $0.86 per share, versus consensus estimates at $0.85 per share. GAAP earnings are seen at $0.60 to $0.64 per share.

Full year earnings for 2014 are seen at $3.55 to $3.75 per share on a non-GAAP basis, versus consensus estimates at $3.64 per share. On a GAAP basis, earnings per share are seen between $2.85 and $3.05 per share.


Hewlett-Packard ended the fourth quarter with $12.2 billion in cash and equivalents. Total debt stands at $22.6 billion, for a net debt position of $10.4 billion.

For the fiscal year of 2013, Hewlett-Packard generated revenues of $112.30 billion, down 6.7% on the year before. The much more modest fall in revenues in the fourth quarter just highlights the recovery which the company is witnessing at the moment.

Despite a difficult year, the company reported earnings of $5.13 billion. Last year the company posted a $12.7 billion loss on the back of $18.0 billion in impairment charges.

Trading around $27 per share, the market values Hewlett-Packard at $52 billion. This values the company at 0.5 times annual revenues and roughly 10 times earnings.

Hewlett Packard pays a quarterly dividend of $0.145 per share, for an annual dividend yield of 2.1%.

Some Historical Perspective

HP's recent troubles have come soon and in a big form, yet the company is making rapid progress under command of Whitman to tackle these issues.

Shares fell from highs of $55 in 2010 to lows of $11 in 2012, down by some 80%. The acceleration in the decline in the personal computer market as well as the failed past acquisition strategy resulted in major losses last year.

Whitman made fast and large restructuring efforts and the decline in revenues and earnings is slowing down. On the back of these efforts, shares have already nearly doubled, trading around $27 per share at the moment.

Since 2010, HP reported a cumulative 10% fall in revenues, falling towards $112.3 billion over the past year. Net earnings fell from merely $8.8 billion in 2010 to $5.1 billion this year after reporting huge losses last year. The company did manage to reduce its outstanding share base by nearly 20% over this time period.

Investment Thesis

Investors are really happy with Hewlett-Packard's results and the reiteration of the company's outlook for 2014. Recently, competitors have seen further weakness as firms like Cisco Systems (NASDAQ:CSCO), IBM (NYSE:IBM) and Intel (NASDAQ:INTC) warned and slumped on the back of further weakness in their core markets. This resulted in low expectations for the quarter.

The strong performance was thanks to the enterprise group which reported solid growth compared to a year ago, and double-digit growth on a sequential basis. The decline in personal computer sales was quite low as well.

The guidance for next year implies that Hewlett-Packard is on track to report GAAP earnings of $5.7 billion. Given the continued improvement of its balance sheet, shareholder payouts are relatively modest. Its $0.145 quarterly dividend cost the company about $1.2 billion per annum. On top of that, HP repurchased nearly $500 million worth of shares over the past quarter, at a rate of $2 billion per annum, or nearly 4% per year. As such, investors still receive combined cash flows of over 6% at the moment. Despite the generous payouts, HP can retain nearly half of its annual profits.

Whitman continues on her path to recovery by cutting costs, rebuilding corporate relationships and benefiting from the recent momentum in business demand for personal computers.

Back in August of this year, I last took a look at Hewlett-Packard's prospects following its third quarter results. At the time Whitman cut the guidance for full year revenue growth into 2014, still citing aggressive pricing and macro-economic headwinds. Back in October she did mention that the fall in revenues is expected to slow down. This is further evident in the fourth quarter report. The decline in revenues was still 10.1% on an annual basis in the second quarter, improved to a 8.2% fall in the third quarter, and came in at just minus 2.8% in the final quarter.

As revenue trends are improving, it is time for HP to focus on other strong growth areas including smart phones, tablets, the cloud-business and even the 3D industry, as announced by Whitman. Investors still have to wait for 2015 or 2016, when HP can "fire up all its cylinders". For now, the financial position, revenue trends and cost structure are all improving, and investors are right to be cheerful about these trends.

At merely 9 times earnings, despite long term headwinds, HP still deserves credit and remains attractive. The improved balance sheet and high sense of urgency continue to boost appeal while the business continues to show signs of a further recovery.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.