Hewlett-Packard Company Looks Strong Before Earnings

Hewlett-Packard Company finally started to make real progress in its turnaround last year. Will it continue improving in 2014?

Feb 18, 2014 at 8:00PM

On Friday, shares of Hewlett-Packard Company (NYSE:HPQ) closed at $30.02. This was the first time HP stock ended the day above $30 in two and a half years!

HP has been through some rough sledding in recent years, but the business is finally stabilizing and the company is expected to post EPS growth this year for the first time since 2010.

HP's two most important businesses -- printing and enterprise hardware -- ended the 2013 fiscal year with strong momentum. There's a good chance HP has maintained this momentum going into 2014. If HP's upcoming earnings report confirms this improving picture, HP stock could surge even higher.

Long road back from chaos
The last time HP shares ended the day above $30 was August 17, 2011. (HP stock closed at $31.39.) The next day, HP issued a weak earnings forecast, discontinued its slow-selling WebOS-based smartphones and tablets, stated that it was buying British software firm Autonomy for more than $10 billion, and announced that it was considering a spinoff of its PC business!

This marked the beginning of chaos at HP. Within a month, HP's board had given CEO Leo Apotheker the boot, replacing him with current CEO Meg Whitman. A few months later, HP decided to keep the PC business after all. A year after that, HP took a massive $8.8 billion writedown on its purchase of Autonomy, alleging that it had been defrauded because of improper accounting procedures at Autonomy.

Incidentally, on the same day HP disclosed the Autonomy writedown, its stock bottomed out at $11.35. Since then, it has come roaring back, gaining more than 150% through the end of last week.

HPQ Chart

Hewlett-Packard 5 Year Stock Chart, data by YCharts

Some of HP's gains can probably be attributed to the strong performance of the stock market. However, it has also started to show clear signs of progress in its turnaround.

Signs of progress
HP's two most important business segments are printing and the "Enterprise Group," which primarily sells enterprise hardware like servers, storage, and networking. Together, these two businesses account for 70%-75% of HP's segment profit.

These two businesses also happen to be the furthest ahead in the turnaround process. Luckily, while the PC and enterprise services businesses both continue to struggle, neither one is a particularly significant contributor to HP's earnings anymore.


HP makes lots of money selling high-margin ink and toner.

In printing, HP actually grew segment pre-tax earnings by 8.5% last year. HP is likely to deliver another year of strong earnings growth in the printing business in 2014. First, the company has been dialing back on sales of low-margin consumer printers in favor of commercial printers that will get heavy use and drive long-term sales of high-margin ink and toner. Commercial printer sales actually rose 9% in Q4 of 2013.

Second, HP will continue to get a big margin benefit from the weak Japanese yen. The company sources toner and many printer components from Japan, so as the dollar appreciates against the yen, HP's costs decline.

US Dollar to Japanese Yen Exchange Rate Chart

US Dollar to Japanese Yen Exchange Rate data by YCharts.

The Enterprise Group hasn't performed quite as well as printing. In fact, it posted a 17% decline in pre-tax earnings last year. That said, by Q4 it was showing clear signs of improvement, punctuated by a surprising return to revenue growth -- although earnings continued to decline.

2014 could be a pivotal year for HP's Enterprise Group. The declining parts of the enterprise hardware business, such as UNIX servers and tape-based storage, are now small enough that their declines can be outweighed by growth businesses. This includes the "Moonshot" line of micro-servers and the 3PAR line of next-generation storage arrays. As these newer product lines scale up in the next few years, they should drive a return to profit growth in the Enterprise Group.

Foolish bottom line
Last year, HP made significant progress turning around its two most profitable businesses. It also finished repairing its balance sheet, surpassing its target of reaching zero net debt by the end of 2013. This allows it to more aggressively return cash to shareholders.

CEO Meg Whitman has previously warned that HP's turnaround progress will be uneven, so there is no guarantee that the upcoming earnings report will live up to expectations. However, with the printing and enterprise hardware businesses steadily improving throughout 2013, the general trend this year is likely to be positive. With HP's earnings multiple still sitting at about half the market average, the risk-reward trade-off for HP continues to look attractive.

Three top stocks for the cloud revolution
There are few things that Bill Gates fears. Cloud computing is one of them. It's a radical shift in technology that's behind some of HP's most exciting products. Cloud computing has early investors getting filthy rich, and we want you to join them. That's why we are highlighting three companies that could make investors like you rich. You've likely only heard of one of them, so be sure to click here to watch this shocking video presentation!

Adam Levine-Weinberg owns shares of Hewlett-Packard Company. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information