Hewlett-Packard Company Earnings: Is the Turnaround Still on Track?

On Thursday, Hewlett-Packard (HPQ 0.69%) will release its quarterly report, and investors have been happy with the progress that the tech company has made in its turnaround efforts. Yet even though the stock has risen to its highest levels since 2011, Hewlett-Packard still faces the challenge of matching up to IBM (IBM 0.06%), Cisco Systems (CSCO 0.44%), and other players in the tech industry, all of which are moving aggressively to claim their own piece of the highest-growth areas available.

Hewlett-Packard took a serious hit in 2012, as the failing prospects for the PC industry called into question its entire business model. But even as the PC area faces challenges, Hewlett-Packard has identified its enterprise clients as having the greatest ability to boost the company's long-term prospects. Enterprise customers look to HP and its rivals for hardware solutions to help bolster their data-analytics and cloud-computing capacity, in addition to software and services to help make the most of the information they're collecting. The turnaround efforts of CEO Meg Whitman have started to show signs of success, and HP hopes that it will be able to recover fully and stand up to Cisco, IBM, and its many other rivals across its numerous business lines.

Let's take an early look at what's been happening with Hewlett-Packard over the past quarter and what we're likely to see in its report.

Stats on Hewlett-Packard

Source: Yahoo! Finance.

Will Hewlett-Packard earnings start growing faster?
In recent months, analysts have had mixed views on Hewlett-Packard earnings, cutting April-quarter estimates by a penny per share but boosting full-year fiscal 2014 and 2015 projections by about 1%. The stock has continued its climb, gaining 10% since mid-February.

Hewlett-Packard's fiscal first-quarter results in February validated its ongoing recovery, as adjusted earnings per share and constant-currency revenue rose for the first time in three years. Investors were shocked to see gains in Hewlett-Packard's PC-focused personal systems segment, but they've largely started looking more at the key enterprise segments. There, the picture was more mixed, as HP posted a 7% decline in enterprise services but a roughly 1% gain in the more hardware-focused Enterprise Group segment. From a longer-term perspective, Hewlett-Packard has to work harder in order to take full advantage of the opportunity on the enterprise side of the business, as revenue has actually fallen since the company started breaking the segment out two years ago. That weakness raises concerns about HP's ability to compete with Cisco and IBM in that key business, even though those competitors have seen their own share of challenges in growing their enterprise-business exposure.

The enterprise opportunity is large for Hewlett-Packard, as it already made up around half its revenue and operating profit in fiscal 2013. But the big question is whether HP should focus on services or on hardware. IBM has decided to emphasize services, having sold off its low-end server division recently. But even though hardware has lower margins than software and services, Hewlett-Packard has substantial expertise in the hardware area that could give it a competitive advantage. Cisco has also moved aggressively into the enterprise server market, and it's likely to keep challenging Hewlett-Packard for supremacy even as both companies also look to offer higher-margin services.

Source: Hewlett-Packard.

One area where Hewlett-Packard needs to improve is in research and development spending. HP has gone through a large cost-containment program in order to boost its profitability, and that has played a key role in sending the stock higher. But Hewlett-Packard spends less on research and development than either IBM or Cisco Systems, and some analysts worry that HP's stinginess could hold it back from taking advantage of key growth areas like the Big Data initiative or cloud computing.

Perhaps in order to address the need for more innovative products, Hewlett-Packard has hinted at plans to enter the 3-D printing market aggressively. If Hewlett-Packard can deliver on an implied promise to improve speed, quality, and efficiency of the 3-D printing process, then it could eventually make huge waves throughout the lucrative high-growth industry. Yet expecting that to happen overnight is unrealistic, given the head-start that even the smaller 3-D players have over HP.

In the Hewlett-Packard earnings report, watch to see how well the company performs in the enterprise hardware and services businesses, as they're the areas in which competition with Cisco and IBM is most relevant. Moreover, look for more details on HP's plans to enter the cloud-computing market more aggressively, since the company will need to succeed on the cloud front in order to satisfy enterprise customers that it can offer a full suite of IT products and services for all of their needs.

Click here to add Hewlett-Packard to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.