It’s time to check up on the progress that
Hewlett-Packard Company (NYSE:HPQ) is making. The turnaround really is a long-term investment, and if you have a five-plus year horizon, this stock might be worth taking a look at. The only way HP can expect a turnaround is if it manages to come up with new innovative products.
Although net income has tanked of late, HP’s free cash flow generation remains strong.
Hewlett-Packard Company (NYSE:HPQ) generated some $10.3 billion in free cash flow over the last 12 months compared to less than $1 billion that it paid out in dividends.
The real drag for the company has been its printing and personal-systems group, which provides commercial PCs, consumer PCs and various handheld computing devices. This segment managed to account for some 77% of revenue in 2012.
Meanwhile, its enterprise storage and servers segment services both enterprise and small businesses, and generates some 17% of revenue.
Hewlett-Packard Company (NYSE:HPQ) is the largest player in the personal computing market with 16.5% market share, while also holding a leading position in the server segment with 32% market share. As PC headwinds continue, the server business will become a larger part of the company.
PC headwinds are continuing. According to Gartner, first quarter worldwide PC unit shipments declined 11% year-over-year. Hewlett-Packard Company (NYSE:HPQ)’s 1Q PC unit shipments are forecast to have been down 24% year-over-year, but the company remained one of the leaders in PC market share, with HP and Lenovo having just under 15% market share each.
The recovery in HP’s end markets will likely continue to be strained, at least over the interim. However, its major growth opportunities include the cloud computing space and the development of new products to help it penetrate the tablet space.
I’m encouraged by HP’s transition and initiatives, including its business process outsourcing solution and a customized mobile application for the U.S. Department of Housing and Urban Development. These are key steps in the transition from the PC market to other high-margin businesses.
Going in to 2013, there were a total of 47 hedge funds long the stock, with Pzena Investment Management having the largest position in the company, worth close to $586 million and comprising 4.8% of its total 13F portfolio. At number two was Relational Investors with Hewlett-Packard Company (NYSE:HPQ) making up 9.4% of its 13F portfolio.
Weakness spreads
Dell Inc. (NASDAQ:DELL) is another major global IT and PC company. It is making serious efforts to restructure its business as nearly 70% of its business is linked to the PC market. The PC market has been impacted by weak macro-economic concerns and tablet cannibalization. What’s more is that revenue from Dell Inc. (NASDAQ:DELL)’s consumer business declined by 24% year-over-year last quarter, a substantial fall compared to its other segments.
The PC company has been the talk of a potential leveraged buyout of late. Founder Michael Dell Inc. (NASDAQ:DELL) had made plans to acquire the company for $24.4 billion, or $13.65 per share, in cash. This privatization would allow Dell to transition away from the PC business and away from public scrutiny. Meanwhile, Dell is facing increased competition in its server and storage markets from the likes of International Business Machines Corp. (NYSE:IBM).
Microsoft Corporation (NASDAQ:MSFT) designs and sells hardware, as well as PC-related software, operating in five segments: Windows and Windows Live, server and tools, online services division, Microsoft business division, and the entertainment and devices division. Although Microsoft operates across five major segments, that doesn’t necessarily translate into diversity.
More than 50% of its sales come from software for PCs and although the PC market may continue to decline over the interim, Microsoft Corporation (NASDAQ:MSFT) is at least posting solid results for the time being. The company recently reported EPS for the first three months of 2013 that came in at $0.72, compared to expectations of $0.68. The company’s major tell-tale over the interim will be adoption rates of its Windows 8 operating system.
But again, the slowing PC market is slowing down, indicating that Windows 8 adoption could take longer than expected. First-quarter shipments of PCs fell 14% worldwide from the same time last year, according to International Data Corp. That’s the deepest quarterly drop since the firm started tracking the industry in 1994. However, with a strong balance sheet, one that includes nearly $75 billion in cash, Microsoft Corporation (NASDAQ:MSFT) could also be a long-term bet on innovation if it shows signs of transitioning away from PCs.
Billionaire Donald Yacktman is one of the top hedge fund owners in both Dell and Microsoft. Compared to Hewlett-Packard Company (NYSE:HPQ)’s 47 hedge fund owners, Microsoft had 95 owners going into 2013. Yacktman has the largest position in Microsoft, a $797 million position making up 4.8% of his fund’s 13F portfolio. The second largest stake is held by First Eagle Investment with a $729 million position.
By the numbers
HP also offers investors a solid dividend while they wait for the turnaround.
| HP | Dell | Apple | Microsoft | |
| Dividend yield | 2.4% | 2.3% | 2.4% | 3% |
What’s more is that the computer company is cheap on a number of levels when compared to peers.
| HP | Dell | Apple | Microsoft | |
| Forward P/E | 6.2 | 8.5 | 8.8 | 9.7 |
| Price to sales | 0.4 | 0.4 | 2.5 | 3.5 |
| EV/EBITDA | 3.9 | 4.9 | 6 | 6.5 |
Analysts are also encouraged by HP’s long-term growth prospects, with its expected annualized EPS expected to grow well above that of Microsoft.
| HP | Dell | Apple | Microsoft | |
| 5-year expected EPS growth | 19% | n/a | 62% | 7% |
Don’t be fooled
While most of the PC-industry attention has been on Dell, this could be a great opportunity to snag some HP shares while its still very cheap. Assuming HP should trade more inline with fellow turnaround PC company Dell at a 4.9 EV/EBITDA, the stock would have upside of 40%.
The article Why This Company Is a Good Long-Term Investment in Innovation originally appeared on Fool.com.
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