8 Reasons To Keep Holding Hewlett-Packard

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

When Hewlett-Packard (NYSE:HPQ) reported its quarterly earnings on August 22, the company was considered a long-term investment. When HP hosted its Security Analyst Meeting on October 3, the company gave more reasons to be bearish. In summary, CEO Whitman reiterated what she said in previous quarterly earnings calls: that HP will take four to five years to turn itself around.

Lowered Forecast

HP reduced its earnings forecast to a range of $3.40 - $3.60 per share. The analyst consensus was $4.18 per share. Enterprise services revenue will now decline by 13%, with profit declining $0.29 to $0.35 per share. HP now anticipates hardware will add to a decline in operating profits by $0.05-$0.12 per share.

Earnings from the PC unit are expected to be flat, while HP forecasted growth in the software and printing division.


Some investors think the printing unit and the weak PC market are HP's biggest challenges, but these units are actually stable. HP is still generating massive revenues from these units, but failed to improve profit margins. When PC growth began to slow, but smart phone and tablet demand exploded, HP failed to make the right strategic choices to grow in these new markets. HP CEO Meg Whitman believed that changes in executive leadership caused strategic decisions to be inconsistent. A failure to execute on its business plans is now being identified as the reason HP will take longer to align costs with units that will contribute to revenue growth. The acquisition of EDS was cited as an example where HP failed to integrate the unit with its core business. In that time, HP faced changes in leadership four times.

HP appears very lost, but there is hope. The reasons are:

1) The Printing and Personal Systems unit, which is a $65 billion business, will be simplified as HP cuts laser printer SKUs by 50% in 2013. HP currently makes more than 2,100 laser printer models.

2) Compensation will be changed to align accountability with compensation. This may be accomplished by reducing the complexity of the existing organizational structure.

3) Metrics and scorecards will be implemented to tie compensation to performance together.

4) Investments in Research and Development ("R&D") will be a high priority in pushing the development of refreshed products. For example, Whitman noted HP did not release a new line of multi-function printers in over seven years.

5) Implementation of Salesforce.com (NYSE:CRM) to manage sales will shorten product release times.

6) HP will retrain sales force to focus on selling solutions to customers.

7) Use of free cash flow to reduce debt, repurchase shares, and maintain a dividend payout will help support share price.

8) Microsoft's (NASDAQ:MSFT) Windows 8 release on October 26 will be followed by a product refresh for desktop, laptop, and tablet hardware for HP.

Timeline of Transition

HP will maintain discipline in its capital allocation in 2013. HP is cutting staff by 26,000 by the end of fiscal 2013. From 2013 to 2014, HP plans to make investments that support a recovery and growth for each business unit. New product launches will take place between 2013 and 2014. By 2015, HP is aiming to sustain and accelerate growth. In 2016, HP wants to demonstrate product and service leadership in areas that include cloud, security, and information.


HP investors lost faith in the company when the company revised earnings downward. Investors are discounting the value of products that will take time for HP to growth them effectively. HP has the potential to significantly grow a number of products. For example, 3PAR, StoreOnce, its Gen8 server line, and Moonshot, a high-density hyperscale product offer growth potential for HP. This potential growth may only be realized once HP improves its operational capability in managing its product launches to market.

HP is a company for investors who are patient and have a long-term time horizon for the company. HP closed recently at $14.73, near a 52-week low. In the short-term, slower growth in China and weakness in Europe will continue to hurt HP. HP shares may make new yearly lows, but investors will be paid to wait, with a dividend that yields 3.60%, while the company works to turn itself around.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HPQ over 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.