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Has Hewlett-Packard Become a Safe Bet Overnight?

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Hewlett-Packard (NYSE: HPQ  ) is largely perceived as an older-generation technology company that has struggled to maintain its profitability, as consumers have shifted toward mobile devices and cloud computing. Given the fact that this is a company that continues to be primarily dependent on the fast-fading PC industry, HP's recently reported fiscal first-quarter earnings seemed to be a pleasant surprise.

Its $28.2 billion in revenue managed to beat Street estimates of $27.2 billion, and the company's non-GAAP profit of $0.90 per share also remained ahead of analyst expectations of $0.84 per share. HP issued non-GAAP profit guidance for the current quarter that remained at the high end of analyst estimates, prompting an initial 2.5% rise in the company's stock price.

It's good that HP's revenue fell by around 1% on a year-over-year basis, compared to the 4.1% decline that some analysts were expecting. But two of the company's most important divisions, which include enterprise computing and printing, failed to live up to growth expectations.

That brings us to the big question: Are HP's future prospects really based on solid foundations?

One good thing about PCs
A surprising component of HP's first quarter earnings story is its personal systems division -- the one that includes PCs. For the first time in seven successive quarters, this division posted an increase in revenue -- up 3.6% to $8.53 billion -- due largely to an 8% uptick in commercial PC sales. However, a large part of this success may have been prompted by Microsoft's decision to withdraw support for its Windows XP operating system after April this year, which led to a lot of companies rushing to upgrade their existing machines. That would make this a one-off scenario that's unlikely to be replicated anytime soon.

On the other hand, HP's consumer PC-based revenue posted a 3% decline, which seems to be more in sync with the real picture, where PC shipments have recorded their seventh consecutive quarterly decline as at the end of 2013, according to research firm Gartner.

What about the others?
What's really surprising is HP's continued dependence on the PC industry at a time when most of its industry peers, such as Cisco (NASDAQ: CSCO  ) and IBM (NYSE: IBM  ) , are trying to move away from it. But that does not mean they have fared any better in recent months.

Cisco, the world's largest manufacturer of networking gear, has been forced to issue negative revenue guidance for the current quarter after experiencing weak sales because of a dominant shift in consumer preferences toward cloud computing. IBM's revenue continues to be dragged down by the same shift toward cloud computing, and the company's systems-hardware division saw a whopping 25% drop in revenue during the recent fourth quarter.

Coming back to HP, its biggest cause for concern seems to be the lackluster performance of two key divisions: enterprise-computing and printing.

Someone new on the server horizon
The enterprise-computing group that caters to the server and related hardware markets posted revenue of $6.99 billion that was largely flat on a year-over-year basis. However, potential investors need to focus on a slight decline in the division's operating margin, a possible sign of lowered future profitability.

Although HP currently leads the worldwide server market with a 28.1% share, according to research firm IDC, the company faces stiff competition. Servers are increasingly becoming commoditized as a product segment, and brand names tend to matter less. Even worse news is IBM's recent decision to sell its server business to Chinese tech giant Lenovo, the current global leader in PC shipments .

With Lenovo having a history of settling for lower margins in order to gain greater market share, HP has every reason to feel threatened. With the enterprise-computing division accounting for around 40% of its operating profit, the company simply cannot afford such a scenario at this juncture.

Printing a new chapter
The printing division, the other major segment for HP in terms of operating profit share, also put up a poor showing, with a 2.2% year-over-year decline in revenues to $5.82 billion. The division's only bright spot was a 5% uptick in hardware unit sales as compared to an 11% decline during the same period last year. What remains to be seen is whether the company's plan to make a big splash into the 3-D printing industry by the middle of this year makes a significant difference in the division's revenue.

Some Foolish final thoughts
The disappointing performance of two of HP's main operating divisions does not bode well for a company that has already seen significant management turmoil and continues to undergo the pains associated with what seems to be a highly mismanaged acquisition.

The rise of new competitors such as Lenovo should be enough to set alarm bells ringing at HP, which has failed to make a significant transition into either mobile or cloud computing. Although the company's debt and free cash flow are impressive, investors should probably do little else other than sit back and keep a close watch on HP's near-term developments.

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Read/Post Comments (12) | Recommend This Article (1)

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 February 25, 2014, at 4:46 PM, PropioFurbo wrote:

    Sudhadeep, when you wrote the article about HP on 9/5/2013 entitled "Time to Hit the Delete Key on HP" the stock was selling for about $22. About 3 months later, not being embarrassed enough by your wrong call, you wrote a second article about HP entitled "Is This Really a Sign of Good Times for HP?" and the stock was selling for $27.25 at the time. Now again, not quite 3 months later, you write your third epistle about HP entitled "Has Hewlett-Packard Become a Safe Bet Overnight?" with the stock hovering around $30 a share. I don't know what they say in cricket but to use an old baseball phrase, 1 - 2 - 3 strikes and you're OUT. Take my advice and try "analyzing" another company. Your critical articles with regard to HP have been laughable. I would waste an hour if I tried to point out all the commentary that you've made that is simply wrong let alone ludicrous. The Motley Fool must not set a very high bar to allow individuals like yourself to publish their articles. I see that you have ZERO people following you and I can certainly see why.

  • Report this Comment On February 25, 2014, at 5:44 PM, shesalloverit wrote:

    Lenovo? Server threat? Seriously? I realize that Lenovo purchased the X86 server line from IBM, but purchasing a hardware group does not make you a trusted adviser in any industry, and particularly not in the IT industry. HP has been on the raised floor of the IT departments within the Fortune 500 for 30 years, and owns the largest share of the worldwide server market. Acquiring and implementing servers is nothing like buying laptops, desktops, or notebooks. Those are truly commodity items, and as much as you Sudhadeep would like to imagine that the same is true of enterprise servers, that statement from you only serves to reveal how little you truly know of corporate IT technologies, processes and culture. If a laptop fails, no major harm done. If a server fails, and does so at the wrong time, any number of things can happen, and typically none of them are good. CIO's are involved in picking the companies that will walk the raised floor, and they are buying more than commodity architectures.... they are buying a good night’s sleep, and assurance that their environment is capable, safe, and redundant. Those attributes require exceptional engineering, security that is seamlessly embedded in systems end to end, and fail over architectures that inspire confidence and trust. HP has been delivering those to customers for decades now. It is the very reason that 90+ percent of 911 systems run on HP servers. In other words, if your life depends on it, you want an HP logo on the front of the server. Let your children play their games on Lenovo devices; I'll bet the lives of the adults in the room on HP.

  • Report this Comment On February 25, 2014, at 11:58 PM, subhadeeptech wrote:

    PropioFurbo Good to see u following short term market sentiments! Enjoy!

  • Report this Comment On February 26, 2014, at 12:00 AM, subhadeeptech wrote:

    PropioFurbo And the dividends really count!

  • Report this Comment On February 26, 2014, at 2:53 PM, dilfarb wrote:

    and you keep living in the past (talking about management turmoil and an acquisition years in the past that's already been written down).

  • Report this Comment On February 26, 2014, at 4:29 PM, PropioFurbo wrote:

    Thank you dilfarb for pointing out something to which I certainly had a similar reaction as I read the article. Frankly, it didn't take long to realize where this "analysis" was going. In the very first paragraph, Subhadeep pens the following,

    "Given the fact that this is a company that continues to be primarily dependent on the fast-fading PC industry, HP's recently reported fiscal first-quarter earnings seemed to be a pleasant surprise."

    What??? HP's business is primarily dependent on the PC industry? In what fantasy land do you live where this is a "fact"? It should have been at this point that I just quit reading. How in the world do you characterize HP as simply a PC maker rather than the IT giant that they are?

    Besides, it seems that you're not very adept at interpreting short term market sentiments Subhadeep even those that span a period of 9 months.

  • Report this Comment On February 27, 2014, at 12:12 AM, subhadeeptech wrote:

    Just in case anyone thought the Autonomy acquisition was a thing of the past:

  • Report this Comment On February 27, 2014, at 11:33 AM, PropioFurbo wrote:

    OMG, I'm shaking in my boots now... this "breaking news" changes everything!

  • Report this Comment On February 28, 2014, at 1:33 PM, subhadeeptech wrote:

    Wow! Companies really need paid support sometimes. Hope they pay well! Hahaha

  • Report this Comment On February 28, 2014, at 1:42 PM, subhadeeptech wrote:

    PropioFurbo Big HP fan and defender against one and all. Hmmm. Good profile page. And quite vengeful too with ZERO followers!

  • Report this Comment On February 28, 2014, at 1:44 PM, subhadeeptech wrote:

    OMG I am soooo afraid of Mr PropioFurbo getting personal. Njoying this!

  • Report this Comment On February 28, 2014, at 1:49 PM, subhadeeptech wrote:

    Am so happy someone cares so much about HPQ. This defense is truly optimism personified! Wow!

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