At Multi-Year Highs, Is the Hewlett-Packard Company a Buy?

Hewlett-Packard's much-touted turnaround doesn't seem to have changed the numbers much so far, but a number of catalysts could propell the stock higher.

Mar 24, 2014 at 8:30PM

The alleged turnaround of struggling computer giant Hewlett-Packard (NYSE:HPQ) was one of the biggest stories in tech over the last year, as investors cheered the company's efforts and sent the stock on an impressive rally. Now, trading at levels last seen in 2011, some are beginning to wonder whether the stock's performance is backed by its fundamentals. Commentators seem divided on the issue, some believing that the turnaround will gain traction, and others maintaining that the numbers have been disappointing.

Recent performance: dubious
The company's performance over the last few years doesn't exactly scream "buy." Since Meg Whitman took over, at the end of 2011, things haven't improved meaningfully, with sales declining in the company's core areas. So lets just focus on revenue figures here, as the company's full-year earnings-per-share numbers have been choppy to say the least, in part due to the Autonomy fiasco.

For full-year 2012, the first year of Meg Whitman's five-year turnaround plan, net revenue declined 5% to $120.4 billion. In 2013, full-year revenue dipped again, this time by 7% falling to $112.3 billion, currency effects accounting for around 2%. By segment, the business doesn't look too healthy either. I don't think anyone was expecting much from the company's PC or printing businesses, as the market for both categories have been in decline and margins are generally low.

The enterprise segment was down by 5% in 2012 and 2013, although a 1% increase is projected for 2014. This one is worth watching, as it is potentially one of HP's most lucrative growth segments. Things aren't expected to get much better for the services segment, down 8% in 2013, and is projected to fall by another 5% through 2014. Software is up by about $300 million between 2010 and 2013, but this pales in comparison to the $15 billion Whitman has spent on software-related acquisitions. So, no huge improvement so far.

Possible catalysts going forward
Optimism surrounding HP's hardware segment was boosted by a better than expected performance in its first quarter of 2014. HP is looking to revitalize its fading PC business by getting back into the tablet market, a move which was well received by analysts. HP seems to be targeting the enterprise tablet market, with high-spec tablets running Microsoft's (NASDAQ:MSFT) Windows 8.1 platform.

Windows tablets are expected to reach a market share of 10.2% by the end of 2014, up from around 3.4% currently . The expected increase can partly be attributed to a Windows 8.1 licensing fee cut, although this will only affect devices costing under $250 and is as such not of much use to the enterprise market, which generally consists of high-quality tablets. In general, Windows 8 has a fairly small footprint in the enterprise arena, although any increased market share among consumers should be seen benefiting HP.

Another area in which HP made waves recently is a rather mysterious announcement regarding 3D printing, news which sent 3D printing pioneers such as 3D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS) tumbling. Whitman stated that the company would have a large 3D printing announcement by June this year, hinting that it would be able to significantly increase both the speed and the quality of 3D printing. Initially, HP's foray into actual 3D printers will focus on the business side of things. 3D printing stocks have been under fire recently due some poor results coming out of the industry.

However, some analysts believe that HP entering the market will be a boon to 3D Systems and Stratasys rather than a threat, arguing that it might break open the market by increasing the viability and credibility of the industry. With plenty of cash to throw at the foray, HP might be able to help the market mature more quickly.

The bottom line
Currently, Hewlett-Packard's prospects look somewhat murky. On the one hand, the turnaround, so touted in the financial media, doesn't seem to be materializing on paper. On the other hand, HP does have a number of promising avenues for growth, which may allow for some further upside in the coming year.

As such, you would be wise to check on the sales of the company's core segments, with hardware possibly getting a boost from tablet sales and the enterprise segment probably posting a small sales increase this year.

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems, Microsoft, and Stratasys. 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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