Hewlett-Packard Company (HPQ): Is This Earnings Rally Justified?

Competition

HP’s segments operate in mature markets so understandably the company operates in a tough competitive environment. While the enterprise segment is important to turnaround efforts for HP, the performance in the printing and PC segment will decide the future of the company. The PC segment is not only hotly competitive but is also undergoing a radical transformation to touch based systems. Microsoft has jump started this evolution with the introduction of its Windows 8 operating system. Manufacturers such as Dell Inc. (NASDAQ:DELL) and HP have already launched a number of hybrid tablets to tap the growing tablet market.

To make matter worse, Microsoft has also launched its own Surface RT and Surface Pro tablets. The company has seen a good response to RT but a mild one to the Pro. The software giant was forced to sell the hardware on higher price points to ensure its OEMs such as HP and DELL get a fair shot at selling their own products. Meanwhile, the situation is getting worse in the PC segment with Gartner reporting another decline in PC sales.

According to the research firm the PC sales have declined by 4.5% in the fourth quarter of 2012. HP has regained control of the market and has increased its market share to 16.2% as compared to 15.5% in the 4Q 2011. Dell has also suffered from the decline in PC industry with the company going private in an attempt to move away from the Wall Street spotlight. According to Gartner Dell’s share of the PC market reduced from 12.2% in 4Q 2011 to 10.2% in 4Q 2012.

Bottom Line

The earnings show that HP is headed in the right direction with cost cutting resulting in higher margins. The stabilization of the PC market share should also be good news for investors as the company drives a large part of its revenues form PC. The penetration of Microsoft’s Windows 8 into the highly competitive tablet market and the success of hybrid devices will determine the fate of the PC industry. I recommended that investors buy HP when it was trading in the range of $13-$14, but I believe the company will have to dish out more fundamental positives before it can push the $20 mark.

The article Is This Earnings Rally Justified? originally appeared on Fool.com and is written by Mohsin Saeed.

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