Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How Meg Whitman Plans to Revive Hewlett-Packard

After trading down in the after-hours session on May 22, shares of legendary PC company Hewlett-Packard (NYSE: HPQ  ) gained 6.1% on May 23 as investors viewed the company's announcement of job cuts as a positive. However, since 2007 Hewlett-Packard has been challenged by a shrinking PC industry and the rise of Chinese manufacturers such as Lenovo (NASDAQOTH: LNVGY  ) , which employs aggressive pricing strategies and efficient production cycles to gain market share.

To improve efficiency, Hewlett-Packard's CEO, Meg Whitman, said on the earnings call that the company would eliminate 16,000 jobs on top of 34,000 previously announced cuts. Whitman, who has been earning a salary of $1 since she joined the company in 2011, is trying to revive Hewlett-Packard by implementing a five-year plan. Will she succeed?

Source: Hewlett-Packard

Earnings review
Results were pretty much inline. The company reported earnings per share of $0.88 with $0.88 expected on revenue of $27.3 billion with $27.4 billion expected.

Although this was the 11th straight quarter of declining sales for the company, it was still able to generate $3 billion in cash flow from operations and returned $1.1 billion to shareholders through dividends and buybacks. 

The plan
The company also announced that it would cut an additional 11,000 to 16,000 jobs, bringing the total number of job losses to 50,000 under Whitman's restructuring plan. 

The job cuts are just one part of Whitman's plan to revive Hewlett-Packard. Whitman, who is well-known for urging employees to take Hewlett-Packard's setbacks personally, wants to make the company into a major player in the corporate-technology segment, along with IBM and Cisco.

Whitman is also very famous for her focus on efficiency. The layoffs that were announced on the earnings call account for between 3% and 5% of the company's overall workforce, and the company expects to save $1 billion in operating costs by 2016 because of them. This should help the company continue to generate positive cash flow despite a shrinking PC industry. Also, since more than a third of the cash the company generates each quarter goes to financing shareholder returns, the dividend and buybacks look safe for the time being.

The future
That being said, there may be more clever ways for the company to use the cash. It's great to hear about dividends and buybacks in the short run, but in the long run the company needs to find new revenue sources in order to survive.

Creating a new line of products is a very hard, though not impossible task. In the past, Apple -- which once upon a time had a minimal share of the PC market -- used innovation to create superb products, such as the iPod, iPhone, and the iPad. To produce innovation, Hewlett-Packard could start by increasing its expenses related to research and development, or R&D. At the moment, the company has one of the lowest R&D budgets in the industry.

Finally, the company still has plenty of things to learn from competitor Lenovo, which took the market-share lead from Hewlett-Packard in 2013. The Chinese company bought IBM's PC division when the market for the PC had already matured. By buying a well-recognized brand, moving its production to China, and installing a highly efficient cost structure, Lenovo became famous for its aggressive pricing and high quality standards. It now plans to use the same trick with Google's Motorola brand and IBM's server business.

Hewlett-Packard, which already owns a famous brand, could adopt a similar strategy by acquiring promising and scalable start-ups and bringing their products to the mass market using an efficient production cycle.

Final Foolish takeaway
It's too early to know if Meg Whitman's plans to revive Hewlett-Packard will work. That being said, the recent announcement that the company will fire 16,000 people could be seen as a positive, as Hewlett-Packard may be too big and bureaucratic. Finally, the company should not only focus on efficiency, but also on innovation, which it could achieve by spending more on research and development or identifying and acquiring promising start-ups.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Read/Post Comments (1) | 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 May 28, 2014, at 12:52 PM, Hoptopia wrote:

    HP needs to do what IBM did and jettison the consumer market PC business and focus on enterprise servers and services. What's more they need to stop making really bad buyouts that reduce focus on their core business. You aren't going to compete with the Apple's and Googles in the consumer market.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2970751, ~/Articles/ArticleHandler.aspx, 8/29/2015 10:59:10 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Victoria Zhang

I'm an economist, coffee addict and value investing fan. My obsessions include fashion, online retail, traveling, disruptive technology, and Asia.

Today's Market

updated 13 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
HPQ $28.03 Up +0.24 +0.86%
Hewlett-Packard Co… CAPS Rating: ***
LNVGY $17.21 Up +0.65 +3.93%