Tomahawk, WI 7/22/2013 (Basicsmedia) – On May 1 2013, Hewlett-Packard (NYSE:HPQ) hit a new 52-week high for the second time since it reported quarterly earnings last week, despite a down day for the market as a whole. While the financial press and financial market analysts seem to be confused by HP’s performance, the company is well positioned for a return to modest profit growth next year and beyond. This is sufficient to justify a continued rise in HP’s stock price, since the company currently trades for just seven times earnings.

Growth and decline:

Hewlett-Packard’s notebook and PC shipments has dropped by 24% and 18%, respectively, from the comparable quarter last year. During the quarter, HP successfully cut down its total expenses and costs by 9% to $25.6 billion.

One of the reasons the analyst are not making much of the HP s that some of its businesses are growing while others are declining. As a result, most analysts rate the stock a “hold,” which essentially means “I don’t know” in financial market lingo. It also means that their clients missed out on a 100% gain over the past six months.

Last quarter, all five of HP’s main business units excluding financial services showed revenue declines. PC and related revenue declined 20%, printing revenue declined 1%, enterprise group revenue declined 10%, services revenue declined 8%, and software revenue declined 3%. However, focusing on revenue can make HP’s problems seem larger than they really are: in some cases, HP deliberately traded lower revenue for higher margins (and thus more profit).

Meg Whitman Measures:

Meg Whitman, who was appointed as CEO in September 2011, has been making sweeping organizational changes for the past several months in a bid to make HP a leaner and meaner company. In May 2012, HP said it would cut about 27,000 employees by the end of fiscal year 2014 as part of a restructuring that is expected to generate annualized savings of $3.0 billion to $3.5 billion.

However, revenue growth appears to be a stretch but more savings seen in fiscal 2014. Chief Executive Meg Whitman previously said she expected revenue growth in fiscal 2014; although, that is a stretch now with the services run-down partially shifting into fiscal 2014.

HP needs some macro uplift because it is losing share except in printing and networking. Additional cost savings could total 75 cents next year to improve the operating margin to 9.7 percent.

In addition, the free cash flow growth in fiscal 2014 should be limited given future demand headwinds in the form of PC softness and delayed services contract run-offs that may impact the first half of fiscal 2014.

“We question the sustainability of improvement, but management deserves credit for its discipline,” Management said to the media.

Meanwhile, quarterly margin surprised to the upside aided by mix and cost savings. More than offsetting the revenue softness was operating margin improvement from 7.9 percent in the first quarter to 8.6 percent in the company’s second quarter.

The gross margin of 23.7 percent was quite high with the mix shift away from PCs helping. However, it was more than that as the Services operating margin of 2.6 percent was at the high end of the expected range, printers had a healthy 15.8 percent margin, and even PCs improved sequentially to 3.2 percent.


What Meg Whitman is doing differently for turning things at Hewlett-Packard Company (NYSE:HPQ)?

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