Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
On Wednesday shares of ex-Dow Jones Industrial Average (DJINDICES:^DJI) component Hewlett-Packard (NYSE:HPQ) went crazy, rising 9%. The move was the result of the company's reporting earnings on Tuesday after the closing bell, which certainly impressed investors on some level even as it made this one a little nervous.
The company reported net revenue of $29.1 billion for the quarter, while analysts had predicted $27.9 billion. But that was still a decline of 3% from the same quarter in 2012. Non-GAAP net earnings came in at $1.10 per share, in line with expectations, but again down 13% from this time last year. The fourth quarter GAAP net earnings hit $0.73 per share, higher than the posted loss of $3.49 per share the company reported last year -- but that was when HP took a writedown from the poor Autonomy acquisition. Cash flow from operations hit $2.8 billion, again down when compared to last year by 31%.
The company also reported full year results. Fiscal 2013 full year sales hit $112.3 billion, a 7% drop from the $120.4 billion HP reported in 2012. GAAP net earnings hit $2.62, better than the loss of $6.41 in 2012, but, again, that was mainly caused by the Autonomy writedown.
The kicker for me, though, is the margin picture. Just based on Hewlett-Packard's posted net revenue and earnings for the fourth quarter and what analysts were expecting, it is clear that Wall Street was predicting higher margins; otherwise how do you beat on revenue and fall in line with earnings? So how were margins? Non-GAAP operating margins for the quarter came in at 9%, while last year they were 10.4% during the fourth quarter. For the fiscal 2013 year, non-GAAP operating margins fell from 9.3% in 2012 to 8.5%.
Although HP's CEO Meg Whitman has up until just recently done exactly what she said she would do, making changes at the once dominant but now struggling PC company, I am now beginning to doubt her plan. Originally she told investors that the turnaround plan would take five years, and that they would begin growing again during year three. We are now entering year three, and she has told us not to expect growth this coming year.
Okay, no big deal, right? I disagree. When it was announced that Hewlett-Packard was being removed from the Dow Jones Industrial Average, Meg sent a letter to all her employees telling them she hoped every one of them took the news personally and that it was a blow to the HP brand. Unfortunately, the brand was damaged before it was removed from the Dow, hence its removal. And that's what I feel Meg has missed. The brand is no longer what it used to be, the products and offerings the company makes are no longer what customers want, and although Meg has told investors she wants to increase innovation at the company, HP Labs (an exploratory and advanced research division of the company which has created some amazing devices) has seen its budget cut in half during her tenure. While I don't believe throwing money at a problem solves it, research and development dollars are extremely important if you truly want your company to innovate.
And to me, HP's problem is just that. It isn't doing anything different, and in some areas where it is, customers are opting for an even more innovative solution. HP recently released its newest line of servers, the Moonshot system. (I must note that it's a great name, considering the company was shooting for the moon with this product.) The problem here is that, again, HP missed the boat. The same transformation that killed the company when customers move to tablets and delayed PC upgrades is happening again. Customers are moving to the cloud instead of buying their own servers; they are opting to pay someone else a monthly fee. This transition isn't only hurting HP, but industry server titan IBM (NYSE:IBM) as well. Both companies rely on new customers regularly upgrading their servers, but with the cloud they no longer need to do that.
While IBM has proven over the years that it can change and mold itself to continue to remain relevant, I am not confident HP or Meg Whitman will be able to find a place for the company to shine. Having said that, I don't feel the company will vanish in the next two, five, or even ten years, but I don't think it will be a market-beating, must-own stock during those periods either.
The only thing that I feel would make Hewlett-Packard a buy would be the release of a revolutionary product that changed the way we live, similar to how the iPod, iPhone, and even iPad changed the world. But as investors clearly don't have much confidence that Apple (NASDAQ:AAPL) will hit gold again, considering its stock is trading at an insanely low multiple, I have even less confidence that a company that hasn't had a major breakthrough product in years will be able to do the same.
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