Hewlett-Packard's Growth Puzzle Breaks the Shares' Momentum

The stock market recorded a small advance on Thursday, as the benchmark S&P 500 rose 0.2%, putting it within roughly a quarter of a percentage point of last week's record high. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) was up 0.1%, with the technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) was up 0.8%. However, it looks like the Nasdaq will get no help from Hewlett-Packard (NYSE: HPQ  ) tomorrow, after the company announced it will cut an additional 11,000 to 16,000 jobs alongside an earnings report that is feeding investors' concern that revenue growth remains elusive, even as CEO Meg Whitman reaches the halfway point in her turnaround timeline.

Hewlett-Packard may avoid a decline in its stock price tomorrow -- but that's only because part of H-P's fiscal second-quarter earnings release was accidentally posted on the company's website before the close of today's trading, at around 3:28 p.m. ET. The stock, which was up 1.6% around the time of the release, finished the day down 2.3% (you can see the reaction in the stock price on the one-day chart.) In after-hours trading, the stock was down 0.2% at 6:50 p.m. ET. I'm not sure I believe in bad omens, but either way, the report itself contains little to cheer investors.

Let's get to the numbers: Hewlett-Packard was in line with Wall Street's expectations on both revenue and (adjusted) earnings per share:

 Metric

Actual Year-on-Year Growth (Decline)

Analysts' Consensus Estimate

Revenues

$27.3 billion
(1%)

$27.4 billion

Earnings per share

$0.88
+1%

$0.88

Sources: Hewlett-Packard, Thomson FN

I realize that, strictly speaking, HP missed on revenue, but it's not clear that a $100 million miss on a $27.4 billion forecast, or 0.4%, is statistically significant. What is significant, on the other hand, is the lack of any revenue growth. That's a genuine problem when, by Meg Whitman's own admission during the earnings call, "sustained, profitable revenue growth remains our top priority."

Revenue growth is certainly a legitimate goal for any company, but my question in H-P's case is, growth off which revenue base? Given the mix of businesses that H-P is involved in (some of which are in secular decline), perhaps consolidated revenue growth is an unrealistic goal.

Consider that, of its three main operating segments, only Printing and Personal Systems achieved any growth at all (and just 2%, at that.) Even within the Printing and Personal Systems group, all the growth came from Personal Systems (computers), which contributed 30% of the firm's consolidated revenues in the quarter.

Whitman seemed to refer to the magnitude of the challenge on the call, when she stated:

[W]e have had three quarters of flat growth. To me, that is encouraging because you have to stabilize before you can grow. You can see the improvement in virtually all of the different businesses.

Furthermore, the round of job cuts announced today -- 11,000 to 16,000, which brings the total during the company's restructuring to 50,000 -- suggests the company's focus is on cutting costs instead of growing the business.

HP's shares have rallied strongly since they bottomed in November 2012 -- they're up 50% over the past 12 months alone, as the market abandoned the worst of its pessimism and gradually accepted the notion that Whitman's turnaround was gaining traction. However, stabilizing the business is only halfway to her objective and the path to growth remains highly uncertain. Halfway through Whitman's five-year turnaround timetable, investors are now reassessing the magnitude of the challenges ahead. From excessive pessimism, they may have swung to an excess of enthusiasm -- today's drop is a correction, and today's results (and outlook) may have halted the shares' positive momentum until investors get evidence of new momentum in the business.

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