2 Stocks to Watch on Friday: Hewlett-Packard and Groupon

Hewlett-Packard and Groupon: two turnarounds dropping in morning trading.

Feb 21, 2014 at 10:15AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks opened higher today, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.25% and 0.30%, respectively, at 10:15 a.m. EST. Investors are watching two technology stocks that are making big moves on earnings news: "classic tech" turnaround Hewlett-Packard (NYSE:HPQ) and upstart turnaround Groupon (NASDAQ:GRPN).

I'll admit it: I was a naysayer with regard to the odds of CEO Meg Whitman implementing a successful turnaround at HP, one of Silicon Valley's iconic companies. Nevertheless, two and a half years into the job Whitman's efforts appear to be gaining traction, as yesterday afternoon's release of the company's fiscal first-quarter results demonstrate.

Hewlett-Packard isn't out of the woods, to be sure: by way of example, revenue shrank 1% year on year to $28.2 billion (although it would have been flat on a constant currency basis). Still, that was better than analysts had projected and adjusted earnings per share rose 10% year on year to $0.90, beating the $0.84 consensus estimate. HP has now beaten analysts' estimates for revenue and EPS in four of the past five quarters. Finally, the company raised its EPS guidance range for 2014 to $3.60-$3.75 , bringing it in line with the $3.67 consensus estimate.

Whitman appears to have stabilized the business and the market has responded enthusiastically -- shares have gained 77% over the past 12 months. However, the next step may prove trickier still, as the chief executive seeks to produce growth from this amalgam of different businesses. I'm not usually a fan of turnaround investing, as it typically requires a significant leap of faith (particularly in the technology industry), but, at 8.2 times next 12 months' EPS estimate, there may yet be more upside left in HP shares. Still, the stock is down 1.9% at 10:15 a.m. EST.

On the other hand, I'm nowhere close to altering my opinion of online deal provider Groupon, which has essentially been in turnaround mode ever since its November 2011 initial public offering. (I'd argue it never deserved to join the public markets in the first place.)

Like HP, Groupon announced revenue and EPS that beat consensus estimates yesterday afternoon. Unlike HP, it provided a guidance range on EBITDA (earnings before interest, taxes, depreciation, and amortization -- a measure of cash flow) for the first quarter of $20 million-$40 million that fell way short of analysts' $96 million estimate. Groupon blamed this on higher marketing costs and a $20 million impact of two acquisitions the company made last month. In response, the market is brutalizing the stock this morning, taking it down 15.5% at 10:15 a.m. EST. I can't blame investors: Groupon is a poor-quality business in search of itself and the stock doesn't even make sense as a deep value speculation.

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Alex Dumortier, CFA has no position in any stocks mentioned. 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.

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