A Tech Giant With Strong Growth and Cheap Shares

The ink had still yet to dry on new Hewlett-Packard's (NYSE: HPQ) CEO Leo Apotheker's contract before many were ready to label his hiring as a bad move by the tech giant. The former CEO of SAP (NYSE: SAP) was criticized for his short stint at that company, and investors questioned his ability to replace the former transformative leader of HP, Mark Hurd. Larry Ellison, CEO of HP's archrival Oracle (Nasdaq: ORCL), was "speechless," writing in an email to The Wall Street Journal that "HP had several good internal candidates ... but instead they pick a guy who was recently fired because he did such a bad job of running SAP."

In fact, when Hurd's resignation was announced, HP shares dropped 9%, with investors valuing Hurd at about $8 billion in market capitalization. However, the company's shares have recovered these losses under Apotheker, as investors have been encouraged by recent moves by the company and an anticipated company shake-up by the new CEO.

In addition, much is being made about a "new strategy" that Apotheker plans to unveil in March around the time of the company's annual investor meetings. This strategy is expected to focus on HP's shift away from the personal computing space and the redeployment of assets toward continued growth in services, software, networking, and storage. This shift is already well under way, and I believe it is has not been properly priced into the stock, with the current valuation implying that HP will underperform its peers in this area of growth.

Starting from behind
Certainly HP had fallen way behind competitors such as Oracle and IBM (NYSE: IBM), as IBM had the foresight to ramp up its software businesses about a decade ago. However, HP faces a different decision than IBM, which sold its personal computing business to Lenovo in 2005. HP is the leader in the PC business, and it still provides a foot in the door to many enterprises for the company as it looks to continue the expansion of its services and software business. As enterprises look to save money and simplify operations, the advantage of a "one-stop shop" for all IT needs is becoming more compelling, and many competitors are searching for a similar balance.

Even with the slow initial transition earlier last decade, HP has rebounded under Hurd's guidance, and Apotheker's short stint so far has seen continued improvement in growing its business in this space. In the company's full year ended October 2010, its revenue from enterprise services reached nearly $35 billion. Thanks in large part to its purchase of EDS, which nearly doubled its services division overnight, that's up from $15 billion in 2007; the enterprise space now accounts for more than 45% of the company's total revenue.

Picking up the slack
HP has also completed some significant contracts over the last few months under Apotheker's watch that show the company's strategy and combined service leadership is producing results. The largest of these contracts is a deal to supply NASA with $2.5 billion in IT services and products over a four-to-10-year period. The contract will supply NASA with HP personal computers, and services for research, scientific and mathematical applications, as well as security purposes. HP won the business despite battling established government contractor Lockheed Martin (NYSE: LMT), which could prove to be invaluable in pursuing further opportunities with the federal government.

In addition, last month HP inked a reported $400 million deal with BP (NYSE: BP) to combine its hosting services in Europe and the Americas. The deal will also give BP the ability to use HP's cloud computing services and software.

Value presents opportunity
Even as HP continues to grow its enterprise services business shares are valued at a considerable discount to many of its peers in the space.

Leo Apotheker certainly has a difficult task ahead of him in guiding HP forward in a more competitive and continually evolving enterprise technology space, but so far he appears to be up for the challenge. With total PC sales on the decline, many have been quick to dismiss HP due to its leading market position which contributes significantly to the company's total revenue.

However, its leadership is still a position of strength for the company and serves not only as a buffer as the company grows its services and software business, but also as a catalyst for more deals similar to the recent NASA contract. This along with its discounted share price makes a HP in an interesting value play in an overheated technology sector.