Cisco Systems, Inc. (CSCO): Hewlett-Packard Company (HPQ) Is Not Out of the Woods Yet

The importance of cloud computing was something that competitor Cisco Systems, Inc. (NASDAQ:CSCO)recognized much sooner, and the company seems focused on this avenue. In 2013 alone, Cisco Systems, Inc. (NASDAQ:CSCO) purchased six companies related to cloud-based services, all of which were, presumably, meant to boost the company’s competitiveness in the field.

According to the company’s forecasts, global data center traffic will grow nearly fourfold by 2016, and by that time, two-thirds of all data-center traffic will come from the cloud. Its own data center segment grew by 43% year over year, according to the latest report.

Yet, according to many, HP also faces problems in terms of execution, especially in the enterprise group segment, which is seen as crucial to the company’s recovery efforts. For example, it remains doubtful that the company will be able to cut costs faster than its revenue drops, as it has already laid off a substantial amount of its workforce. In any case, it is clear by now that HP’s restructuring and road to recovery will be fraught with difficulties.

Valuations and metrics

HP currently has a negative price-to-earnings ratio, so comparisons are, perhaps, best made in terms of sales. This price-to-sale ratio is very low for HP at approximately 0.4, compared to Cisco Systems, Inc. (NASDAQ:CSCO)’s 2.6. A better comparison is probably with Lenovo, as it is also primarily a hardware maker, which also has a very low price-to-sales ratio of 0.3. HP has a negative return on equity as well as a negative profit margin, and a total debt-to-equity ratio of more than 99. It’s hard to make a case for the stock based on these metrics.

The bottom line

Hewlett-Packard Company (NYSE:HPQ)’s latest earnings report makes it clear that the company still has plenty of work to do in reaching its turnaround goals, now behind schedule. Revenue is still dropping in its core segments, and results aren’t expected to be much better in fiscal 2014. The stock has performed very well this year, partly as a result of turnaround hopes. Yet, it looks increasingly unlikely that the company will be able to catch up, unless it manages to turn around its enterprise group segment. As such, cautious investors may be best off waiting for more tangible signs of improvement. 

The article Hewlett-Packard Is Not Out of the Woods Yet originally appeared on Fool.com and is written by Daniel James.

Daniel James has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems.

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