Hewlett-Packard Earnings: 1 Segment Just Took the Clear Lead in HP's Turnaround

Thanks to the outperformance of its largest segment, HP's turnaround is gaining steam.

Aug 20, 2014 at 9:30PM

The market might not be too impressed by Hewlett-Packard Company's (NYSE:HPQ) fiscal third-quarter results, but that certainly doesn't mean they were bad. To be sure, Hewlett-Packard stock fell roughly 1% in after-hours trading after the company announced quarterly revenue grew "just" 1% year over year, to $27.6 billion.

Helped, in part, by HP's repurchase of around 17.5 million shares for $582 million, that translated to 3% growth in adjusted earnings, to $0.89 per diluted share, which was at the high-end of HP's own guidance for adjusted earnings of $0.86 to $0.90 per share. Analysts, on average, were expecting HP to report the same adjusted earnings of $0.89 per share, but on a slight year-over-year sales decline, to $27.01 billion.

That said, HP did turn in GAAP earnings of only $0.52 per share, which was well below its previous guidance of $0.59 to $0.63. But it also appears that much of that shortfall is expected to be recouped in the current quarter. Though HP dropped the high-end of its previous GAAP EPS guidance by $0.01, it simultaneously boosted the low-end by a full $0.07 per share to result in a new expected GAAP EPS range of $2.75 to $2.79. HP also raised its adjusted earnings-per-share guidance to a range of $3.70 to $3.74, which is a considerable boost over previous guidance for adjusted EPS of $3.63 to $3.75.

This drove HP's solid quarter
To explain Hewlett-Packard's top-line beat, look no further than outperformance from its Personal Systems business, which represents its single-largest segment, and enjoyed revenue growth of 12% year over year, to $8.65 billion. Specifically, 9% and 18% respective unit sales growth in HP's desktops and notebooks led to 14% growth in commercial revenue, and 8% growth in consumer sales. With the lone exception of 2% growth in HP's Enterprise Group -- which focuses on industry standard servers, storage, and networking -- its personal systems managed to buoy year-over-year declines from every other segment, including drops of 4% in Printing, 6% in Enterprise Services, 5% in Software, and 3% in Financial Services.

Meanwhile, HP generated $3.6 billion in cash flow from operations in Q3, good for a 36% increase over the same year-ago period. When all was said and done, HP exited the quarter with a whopping $14.8 billion in gross cash, which should give it plenty of breathing room to further develop its compelling growth opportunities like cloud-based solutions going forward.

It should come as no surprise, then, that HP CEO Meg Whitman insisted she's "very pleased" with HP's progress. Whitman went on to elaborate: "When I look at the way the business is performing, the pipeline of innovation, and the daily feedback that I receive from our customers and partners, my confidence in the turnaround grows stronger."

Foolish takeaway
So why the muted reaction? For one, shares of HP are already up around 25% so far in 2014, and analysts went into the report modeling full fiscal-year adjusted earnings of $3.72 per share -- smack dab in the middle of HP's freshly raised guidance. It makes sense on the surface, then, that the market is effectively shrugging its shoulders in response to HP's otherwise solid report.

In the end, however, with shares trading at just 0.6 times trailing 12-month sales, and a mouthwatering nine times next year's expected earnings, I wouldn't be the least bit surprised if HP manages to continue rewarding investors as its turnaround gains steam.

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Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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