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?
In reality, macroeconomic weakness has also affected the enterprise segments of all major corporations. Cisco Systems, Inc. (NASDAQ:CSCO) is probably the only company which has exceeded expectations and shown growth in its enterprise division. The company reported a 14% year-over-year increase in profits and a 5% rise in revenues, due to unexpected growth in next-generation network routing products.
However, the biggest entrpise player on the market, International Business Machines Corp. (NYSE:IBM), is facing problems. The company has just reported one of its worst quarters ever, resulting in its biggest single-day stock decline of the last eight years. It is trying to sell a part of its server division to the Chinese manufacturer Lenovo, which turned down the offer for its reportedly high price.
The poor performance of the world’s leading enterprise company shows that the much-coveted enterprise segment is not the solution to all of HP’s troubles — and that a small improvement its revenues doesn’t justify such a big rally.
Bottom-line
HP’s PC segment is still sinking faster than expected. Its printer segment barely matched expectations. And the company is still going through a major leadership crisis. The market might credit Hewlett-Packard Company (NYSE:HPQ)’s price rebound with the recovery in the enterprise segment, but established major enterprise players like International Business Machines Corp. (NYSE:IBM) are already facing problems in this space.
Therefore, the market should not expect this single segment to solve all of HP’s troubles, and it definitely doesn’t warrant such an improvement in valuations. Therefore, the current rally is primarily a market overreaction, fueled by HP’s earnings beat and higher equity investment due to a poor bond market. Investors should avoid HP for the time being, and invest only if the company is able to show significant top-line momentum.
The article Is This Comeback for Real? originally appeared on Fool.com and is written by Mohsin Saeed.
Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines. Mohsin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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