Sales were down $1.5 billion to $29.7 billion, failing to meet analyst expectations of $30.2 billion. It also reported earnings of $2 billion for the quarter, which comes out to an adjusted EPS of $1.00, beating the $0.98 adjusted EPS figure analysts were expecting.
But what exactly does the "adjusted" EPS figure mean? Well, it doesn't include the nearly $11 billion in writedowns that would otherwise mean HP lost $8.9 billion for the quarter. I can understand wanting to adjust those results, which CEO Meg Whitman euphemistically termed "decent."
To be fair, investors knew these writedowns were coming; the majority of them were from an $8 billion writedown resulting from the $13.9 billion buyout of Electronic Data Systems four years ago. Essentially, HP overpaid by $8 billion for a single acquisition, and the company has to acknowledge this on its balance sheets. The stock took a beating after the report and closed the week 8% lower than Wednesday's closing price.
No wonder the company is trying to trim costs, cutting 27,000 jobs by 2014. Full-year earnings guidance was also at the low end of previous outlooks, as management cited "soft" demand in PCs and printing.
HP is trying to shift its operational strategy to focus less on PCs and printers and more on higher-margin IT business segments, but it's a slow transition. Dell
While there's nothing wrong with moving into higher-margin tech solutions segments, it says a lot about HP (and Dell for that matter) that it's only doing this now, when it finds itself in dire straits. While I think it's the right move, and both Dell and HP will continue to find it profitable, it's just another example of the "follow the herd" mentality. Companies such as IBM
There were at least some positives for HP shareholders. Free cash flow was $2.1 billion, management raised the dividend 10% during the quarter, and the company also bought back $365 million worth of stock.
A word of caution
From a valuation standpoint, HP and Dell shares both pose the same threat of tricking investors into thinking the stock is cheap. Both stocks trade at a P/E multiple right around 7. On the face of it, it sounds like these stocks could be great opportunities for value-oriented investors. But these companies are participants in a declining PC market; it would be good to see them definitively prove their competency in another business line before you consider investing in their future.
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