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Why Hewlett-Packard Will Keep Hitting New 52-Week Highs

On Wednesday, Hewlett-Packard (NYSE: HPQ  ) hit a new 52-week high for the second time since it reported quarterly earnings last week, despite a down day for the market as a whole. While the financial press and Wall Street analysts seem to be confused by HP's performance, the company is well positioned for a return to modest profit growth next year and beyond. This is sufficient to justify a continued rise in HP's stock price, since the company currently trades for just seven times earnings.

Growth and decline
One of the biggest reasons why Wall Street analysts do not know what to make of HP is that some of its businesses are growing while others are declining. As a result, most analysts rate the stock a "hold," which essentially means "I don't know" in Wall Street speak. It also means that their clients missed out on a 100% gain over the past six months.

HPQ Chart

Hewlett-Packard 6 Month Price Chart. Data by YCharts.

Last quarter, all five of HP's main business units (I am excluding financial services) showed revenue declines. PC and related revenue declined 20%, printing revenue declined 1%, enterprise group revenue declined 10%, services revenue declined 8%, and software revenue declined 3%. However, focusing on revenue can make HP's problems seem larger than they really are: in some cases, HP deliberately traded lower revenue for higher margins (and thus more profit).

PCs and printers are both probably in permanent decline, though the trajectory may be bumpy. However, PCs are responsible for 10% or less of HP's profits, and thus have a minuscule impact on company-level results. Meanwhile, the printer group is declining much more slowly, and actually posted strong year-over-year earnings growth due to margin improvement. Printers are a cash cow for HP and will continue to spin off lots of cash that HP can return to shareholders or invest in growth initiatives.

In the services business, HP provided guidance last fall for a double-digit revenue decline, due to several major account runoffs. However, CEO Meg Whitman expects the services business to provide moderate growth over the long term, particularly because HP is moving into new areas like cloud services and security. HP recently implemented one of the fastest rollouts of technology for the services business. This is expected to improve sales productivity going forward, and should also contribute to a return to revenue growth in 2014 or 2015.

In software, HP saw a slight decline in revenue but higher profit, similar to the printing business. However, the company continued to see strong growth for its Vertica database analytics software, while the scandal-ridden Autonomy division is starting to regain traction. The software division's results show that you need to look below the "business unit" level to see the contrasting areas of growth and decline at HP.

The enterprise group faces a similar situation: HP's long-running lawsuit with Oracle (NYSE: ORCL  ) has exacerbated the decline of its Itanium-based "Business Critical Systems." However, some of the lost profit could potentially be recaptured if HP wins the lawsuit or reaches a favorable settlement (HP alleges that Oracle sabotaged Itanium sales by withdrawing support for the platform in order to boost sales of its own servers). Revenue for industry-standard servers also declined, due in part to steep discounts offered by Dell (UNKNOWN: DELL.DL  ) .

However, HP has finally unveiled its first "Moonshot" low-power servers, which could potentially be a game changer in the server market. Moonshot will probably have a limited impact on revenue this year, becoming a more significant chunk of HP's server business in 2014. HP is also growing in networking (especially software-defined networking). Furthermore, HP announced on its recent conference call that its 3PAR storage business has surpassed a $1 billion revenue run-rate, helping offset declines in tape-based storage.

Foolish bottom line
HP has a few business lines that are declining rapidly, such as PCs, Itanium servers, and tape storage. It also has a few businesses that are declining more modestly but remain strongly profitable, most notably printers. However, outside of those areas, there are plenty of profitable growth opportunities for HP in networking, microservers, converged storage, cloud services, and software.

As these businesses become a more significant part of HP, the company will return to revenue growth (albeit modest growth). Combined with cost cuts, this should justify continued increases in the HP stock price.

The massive wave of mobile computing has done much to unseat the major players in the PC market, including venerable technology names like Hewlett-Packard. However, HP's rapidly shifting its strategy under the new leadership of CEO Meg Whitman. But does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor blip on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.

Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2013, at 2:49 AM, harkvasa wrote:

    Most analysts have been wrong on HP and its prospects going forward. HP should be trading at $35 to $40 range based on current and future earning outlook. It pays very good & increasing dividend, it's balance sheet is getting stronger every day with strong positive cash flow and Mag Whitman is a winner.

  • Report this Comment On May 31, 2013, at 4:25 PM, joshuagenes wrote:

    The future for HP is in 3d printing which they already have a toe in. 3d printing is like the internet in the early 90's. Eventually everyone will have them and they will print whatever they want in multiple material. Want a cake? Print it. Want a car? Print it. Using a process similar to inkjet printing but with laser sintering just about anything can be made. If you laser scissoring things, anything could be manufactured atom by atom and the quantum state of each atom controlled. HP is one of the biggest printing companies I suggest they acquire and invest more heavily in 3d printing and manufacturing. This is the future and a great investment.

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