Hewlett-Packard: Fundamentals Keep Deteriorating As Business Erosion Accelerates

| About: HP Inc. (HPQ)
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Shares of Hewlett-Packard Co. (HPQ) dipped in Wednesday's trading session, in a generally calm market. The company presented details of its turnaround strategy and provided the market with a disappointing outlook for 2013, and beyond.


Hewlett-Packard held its annual Securities Analyst Meeting in San Francisco on Wednesday. CEO Meg Whitman laid out some very uninspiring targets for during the company's reorganization and turnaround period.

Whitman commented that Hewlett-Packard remains well positioned for cloud computing, information optimization and data security. Furthermore, the multi-year restructuring efforts announced in May are based on strengthening of leadership, a drive for innovation and a rebuild of the balance sheet. The company remains on track to deliver on costs savings and complete its restructuring efforts by the end of its fiscal 2014.

Whitman concluded:

"HP has a powerful set of assets, a culture of engineering innovation and a trusted brand. Now we have to focus on bringing our incredible assets together to deliver for our customers, employees and shareholders."

2013 Outlook

For the full year of its fiscal 2013, Hewlett-Packard now anticipates non-GAAP diluted earnings per share of $3.40-$3.60 per share. GAAP diluted earnings per share are expected to come in between $2.10-$2.30 per share. Hewlett-Packard expects to take a $1.30 charge, or roughly $2.5 billion, related to amortization of intangible assets, restructuring charges and acquisition-related charges.

HP Enterprise Services

For the fiscal year of 2013, Hewlett-Packard anticipates a revenue decline of 11 to 13 percent with operating margins of just 0 percent to 3 percent. Under the long-term operating forecasts, the division will show revenue growth of 3 percent to 5 percent, with operating margins coming in between 7 percent and 9 percent.

HP Printing and Personal Systems

The printing and personal division will focus on consolidation of supply chain functions from six sales teams to three. The PC group will focus more on customer needs with a focus on design. The group recently launched the HP ElitePad 900, a tablet focused on businesses. The printing group will target price-sensitive customers in emerging markets. Furthermore, Hewlett-Packard will leverage its hardware and software in combination with Autonomy's solutions, to develop cloud-based document management services.

HP Enterprise Group

The enterprise group will simplify the production portfolio by using common architectures and convergence. The converged infrastructure, cloud, and software-defined data centers, are expected to grow its revenues and market share. By 2015, ARM and Atom servers will aim for a 15% market share of the global server market.

HP Software

The software division currently serves almost the entire Fortune 100 with leading positions in the enterprise software market, expected to grow to $54 billion in 2015. The focus remains on the integration of its acquired businesses and technologies, to deliver innovations in cloud management, security, big data, among others.


Hewlett-Packard ended its third quarter with $9.5 billion in cash and equivalents. The company operates with $29.7 billion in short and long term debt. As such, Hewlett Packard operates with roughly $20 billion in net debt.

For the first nine months of 2012, the company reported revenues of $90.4 billion. The company reported a net loss of $5.8 billion, or $2.93 per share. Excluding the $10.8 billion charge, the company earned $5.0 billion, or almost $2.50 per share. The company is on track to generate revenues of around $120 billion for the full year, on which it could earn $7 billion in non-GAAP earnings, around $3.50 per share.

Factoring in Wednesday's 13% decline, shares are valued around $29 billion. This values the firm at 0.25 times annual revenues and merely 4 times annual non-GAAP earnings.

Currently, Hewlett-Packard pays a quarterly dividend of $0.132 per share, for an annual dividend yield of 3.5%. Despite the gloomy outlook, the company reiterated its stance to continue to pay dividends.

Investment Thesis

Year to date, shares of Hewlett-Packard have fallen some 42%. Shares touched upon $30 in February of this year, and have lost roughly half of their value from that moment in time. A string of weak outlooks and a massive restructuring program, highlighted the operational problems. The decline in the company's operations, followed by a disappointing outlook for 2013, seems to accelerate in recent months.

In August of this year, shares already fell 8% after CEO Whitman decided to clean up the place, taking a one-time $10.8 billion charge related to past acquisitions.

Let me put this first, Hewlett-Packard under the command of CEO Whitman is taking the right steps. While the company might have seen the competitive changes coming, the expensive acquisition-driven strategy has proven wrong. The company already took multi-billion dollar charges on the $11 billion acquisition of Autonomy, and the $14 billion acquisition of Electronic Data Systems.

The clean-up is very costly in the short term. Multi-billion acquisition-related charges and massive restructuring charges resulted in record losses. More worrying, is the acceleration of the implosion at Hewlett-Packard's key personal computer and printing division, among others.

Wednesday's guidance shows that operational performance is more severely impacted, than previously anticipated. Furthermore, the downturn will be more prolonged than anticipated, as revenues will not keep up with the growth pace of the wider economy until 2016.

Shares are trading near their lowest levels in a decade. Valuation levels based on past performance, still look very promising, yet the fundamentals keep deteriorating. While the company still has plenty of financial flexibility, it carries a net-debt position of roughly $20 billion around.

I still don't see any signs of stability, let alone improvements. The dismal outlook for 2013, not only implies lower earnings next year, but over the next five years as well. I remain on the sidelines, as I see few triggers for a short-term rebound.

A significant strategic overhaul, or a sale or spin-off of a division, could act as a trigger for a short-term rebound.

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.