Hewlett-Packard's Restructuring Means Time To Sell

| About: HP Inc. (HPQ)
This article is now exclusive for PRO subscribers.

Hewlett-Packard Co. (NYSE:HPQ) is not the most appealing long-term investment, as it's still undergoing a tumultuous phase of restructuring and realigning operations, while attempting to establish a new identity for the future. Current shareholders should hold or consider a short sell or short squeeze in order to hedge interests. Interested investors should utilize Hewlett-Packard as a short-term investment or consider some of the other more stable firms from the tech sector.

Hewlett-Packard had a weak earnings release report and its outlook is pinned on hopes of becoming a competitive enterprise IT provider and finding an avenue for resurgence in the consumer market. Hewlett-Packard's new focus is on enterprise cloud SaaS, aesthetic redesigns for the PC units, and entering into the mobile sector via smartphone or tablet. This growth and transformation must be organic and may take years to complete if at all successful.

Dell (DELL) is Hewlett-Packard's most direct competitor in the PC market. Hewlett-Packard is partnering with Microsoft (NASDAQ:MSFT) to improve its enterprise portfolio; both Microsoft and Cisco (NASDAQ:CSCO) are more successful firms in the enterprise IT sector. Hewlett-Packard depends greatly on Intel (NASDAQ:INTC) for processing chips, as do many tech firms. Intel's performance is indicative of the overall tech market, while it's less susceptible to the headwinds than individual firms like Hewlett-Packard.

Hewlett-Packard's market cap is around $35 billion, Dell's is $18 billion, Intel's is $115 billion, Cisco's around $101 billion, and Microsoft's around $260 billion. Hewlett-Packard's 0.29 price-to-sales and 1.13 price-to-book ratios are the lowest amongst these firms. Its current and quick ratios around 0.95 are also the lowest among these firms. Hewlett-Packard's 0.95 debt-to-equity ratio is the highest amongst these firms.

Cisco is around the same price per share as Hewlett-Packard; Intel and Cisco are more attractive investments amongst these firms. Cisco's 2.2 price-to-sales ratio is lower than Microsoft's 3.53. Cisco's 1.98 price-to-book ratio is lower than both Microsoft's 3.93 and Intel's 2.38. Hewlett-Packard's -$2.84 EPS is the lowest among these firms. Dell's EPS is $1.69, Cisco's is $1.49, Microsoft's around $2.00 and Intel's EPS is $2.36.

Hewlett-Packard's five-year sales growth was around 6.7%, Microsoft's was around 7.6%, while Intel's was around 8.8%. Both Dell and Hewlett-Packard had a deficit in sales in the past quarter, YOY, of 7.5% and 4.8%, respectively. Dell's 33% return on equity is the highest among the firms, while Hewlett-Packard's 15.7% deficit is the lowest. Dell's debt-to-equity ratio is around 0.87, while Microsoft's and Intel's are below 0.20.

Only Hewlett-Packard's operating margin and profit margin are running at a deficit, down 3% and 4.5%, respectively. All the other firms' return on equity, operating margin and profit margin are significantly higher than Hewlett-Packard's. Intel's 30% operating margin and Microsoft's 23% profit margin are the highest among the firms. Hewlett-Packard has a beta score closer to Dell and Cisco, while all are usually above one.

Hewlett-Packard's average daily volume is around 20 million, only Dell's 18 million is lower. Intel's, Cisco's, and Microsoft's average volumes all exceed 35 million. Both Hewlett-Packard and Dell are trading at a deficit, down 28% YTD through late September. Hewlett-Packard's annualized dividend is around $0.53, Intel's around $0.90, Cisco is at $0.32 and Microsoft's is $0.80. Hewlett-Packard's stock has increased 0.3% since its last earnings release.

In Hewlett-Packard's recent earnings release, total third quarter net revenue was $29.6 billion, down from $31.1 billion, YOY. Total third quarter operating expenses increased to $38.5 billion from $28.6 billion, YOY. Hewlett-Packard had an $8.8 billion loss on net earnings, down from $1.9 billion net income, YOY. Hewlett-Packard's long-term debt was up to $24 billion from $22.5 billion at the end of fiscal year 2011.

Hewlett-Packard's cash and cash equivalents for the end of the third quarter was $9.5 billion, down from $12.9 billion, YOY. Net revenue from Hewlett-Packard's seven segments totaled $30.4 billion, down from $32.1 billion, YOY. Hewlett-Packard's PSG accounted for $8.6 billion, Services accounted for $8.7 billion, IPG was $6 billion and ESSN accounted for $5.1 billion. Total earnings from the seven segments totaled $3.09 billion.

Hewlett-Packard is focused on penetrating the enterprise market with Cloud SaaS, data servers, security applications, and other IT services and software suites. Hewlett-Packard is also focused on packaging software, servers, and networking applications, while leveraging scale from its broad portfolio. Hewlett-Packard increased its total layoffs to 29,000, as it continues to pursue ways to reduce costs and plans to be completed with restructuring by the end of 2014.

Becoming one of the leaders in cloud computing, security and information management is at the forefront of Hewlett-Packard's efforts; these are higher margin and higher growth opportunities that Hewlett-Packard needs in order to keep pace with competitors. PSG revenue decreased 10.1%, YOY, while ESSN revenue decreased 3.8%, YOY; software revenue increased 18.4%, YOY.

Hewlett-Packard will be served through its relationship and reliance on Microsoft. Hewlett-Packard recently announced a partnership with Microsoft regarding cloud services for enterprise clients. This is essential for Hewlett-Packard; focusing on enterprise clients with the help of Microsoft can be the saving grace. Hewlett-Packard plans to offer a smartphone in the near future alongside tablets as well; Hewlett-Packard recently designed a hybrid tablet with a detachable screen.

The success of Windows 8 is the best chance Hewlett-Packard has at successfully breaking into the mobile computing sector. There is no real solution or standard for enterprises from the mobile computing as of yet. Windows 8, MS Office 2013 and the ability to secure and encrypt data with mobile devices for work can be the differentiating factor for Hewlett-Packard in the near future.

Updating the designs of HP units will also help drive revenue from both enterprises and consumers alike. Hewlett-Packard has had success in the enterprise sector in providing several security solutions for large enterprises, and helping Telefonica improve operations with information management services. Hewlett-Packard also recently provided IT solutions, including storage, servers and networking to help Latisys create a cloud IaaS to improve its scalability and operations.

Hewlett-Packard also helped Diversified Agency Services to consolidate operations from 71 countries into three cloud data centers in order to streamline operations. Hewlett-Packard has potential in the enterprise market, especially working alongside Microsoft. But, it may take years for Hewlett-Packard to have a significant turnaround from its current status as an outdated tech firm.

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.