Hewlett-Packard Company (HPQ): Is This Comeback for Real?

Hewlett-Packard Company (NYSE:HPQ) has been in the news a lot recently. Once a pioneer in PC and printing technology, the company has fallen on hard times. But despite major setbacks, the company’s stock has appreciated by a phenomenal 95% in the last 6 months. Let’s examine whether fundamental or industry catalysts can justify this rally.

Fundamentals

Hewlett-Packard Company (NYSE:HPQ)’s management has written off $8.8 billion of the $11.1 billion it paid for enterprise software firm Autonomy, blaming the latter company’s misleading accounting for the inflated price it paid. Under immense pressure from the shareholders, and after narrowly surviving a shareholder vote, HP chairman Ray Lane quit his job in April. Worse yet, the company’s facing a declining market for its primary PC and printer products.

With those storm clouds hovering above it, HP reported its first-quarter earnings last week. The market was expecting the company to post an EPS of $0.81 and revenues of $28 billion. Hewlett-Packard Company (NYSE:HPQ) managed to beat earnings estimates by 7% but missed revenue estimates by a mere $400 million. It booked a steep decline in net income, primarily due to weak PC and printer performance. HP’s bottom line declined approximately 30% year over year from $1.59 billion to $1.08 billion.

CEO Meg Whitman’s intensive cost-cutting program is the primary reason behind the EPS beat. Hewlett-Packard Company (NYSE:HPQ) is also shifting away from consumer products, toward a revenue mix dominated by the enterprise segment, which generally has a higher gross margin. Combined with better performance in its printing segment, that shift contributed to H-P’s EPS beat.

The company has already laid off 18,800 employees, and plans to cut 26,000 jobs in total. These restructuring efforts have also contributed to the bottom-line improvement. While PC revenue slipped by 20%, operating margins in that division improved by 3.2%. Margins also remained strong in the printing segment at 15.8%.

The fundamental information from the quarter shows that Hewlett-Packard Company (NYSE:HPQ) is reaping the rewards of an effective restructuring plan. But despite the bottom-line improvement, its business segments are showing no immediate signs of revival. The growth in its enterprise segment is still not enough to counter the revenue decline of Printing and PC segments.

Enterprise Segment

Appealing to big-business customers is the obvious ‘quick fix’ for all manufacturers facing a decline in consumer sales. Meg Whitman is pushing the enterprise segment as a “turnaround” bet for Hewlett-Packard Company (NYSE:HPQ). But does the enterprise market have enough juice to counter the revenue decline in printers and PCs?