International Business Machines Corp. (IBM), Cisco Systems, Inc. (CSCO): Can Hewlett-Packard Company (HPQ) Continue Its Recovery?

HP is in the midst of reducing its global workforce by 29,000 people, with the majority of the reductions having occurred within the past year. As the services business becomes more efficient, margins should return to the high single-digits, which could add $1 billion or more to pre-tax profit (on an annualized basis).

Regression to the mean
While HP has been on an upswing this year, other big tech companies have posted disappointing results recently. Major IT firms like International Business Machines Corp. (NYSE:IBM) and Cisco Systems, Inc. (NASDAQ:CSCO) have both seen slowing demand this year, and have therefore announced job cuts in the past few months.

International Business Machines Corp. (NYSE:IBM) has cut more than 3,000 jobs since reporting a rare profit miss in Q1. Q2 earnings beat expectations, but revenue continued to decline, raising questions about the company’s long-term profit growth potential. More recently, Cisco Systems, Inc. (NASDAQ:CSCO) projected that its revenue next quarter will come in lower than previously expected. As a result of the soft demand environment, Cisco Systems, Inc. (NASDAQ:CSCO) announced that it will eliminate 4,000 positions.

Investors could view competitors’ weak results as a warning sign for HP. However, I think that HP is actually ahead of the curve in that it came into 2013 with much more realistic expectations. As a result, it had already begun reducing headcount by the beginning of the year, whereas International Business Machines Corp. (NYSE:IBM) and Cisco Systems, Inc. (NASDAQ:CSCO) did not start cutting until more recently.  While all three companies face similar headwinds, HP is likely to post stronger earnings growth than International Business Machines Corp. (NYSE:IBM) or Cisco Systems, Inc. (NASDAQ:CSCO) next year, due to its deeper cost cuts.

Turnaround on track
Hewlett-Packard Company (NYSE:HPQ)’s timely cost cuts, reasonable valuation, and new products like upgraded multifunction printers and Moonshot servers provide a recipe for continued share price appreciation this fall and into 2014. The company’s Q3 earnings report should confirm that this budding turnaround remains on track.

The article Can HP Continue Its Recovery? originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Hewlett-Packard. The Motley Fool recommends Cisco Systems (NASDAQ:CSCO). The Motley Fool owns shares of International Business Machines (NYSE:IBM).

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