Not surprisingly, Hewlett-Packard Company (NYSE:HPQ) CEO Meg Whitman sprinkled the recently announced Q2 earnings report with a host of niceties. Statements including, “we beat the upper end of our non-GAAP diluted EPS outlook,” and “we improved our operating company net debt position for the fifth successive quarter,” aren’t a big deal; a little CEO-speak is expected in an earnings release. Thing is, HP’s 17% jump in share price since earnings were announced is largely based on beating its own forecasts. Even more concerning is the way HP “exceeded” expectations.
A few specs
The bright spots, in addition to Whitman confirming Hewlett-Packard Company (NYSE:HPQ)’s guidance for Q3 above analyst expectations, were cash flow from operations and an increased dividend. Cash flow from operations jumped a whopping 44% to $3.6 billion in the second quarter, up from $2.5 billion in 2012. HP’s strong cash flow allowed it to improve an already strong balance sheet, and it’s now sitting on $13.2 billion in cash and equivalents, up nearly $2 billion from two quarters ago.
A sound balance sheet and strong cash flows allowed HP to up its quarterly dividend to $0.1452 a share, a 10% bump from last quarter. At 2.49%, Hewlett-Packard Company (NYSE:HPQ)’s new dividend yield isn’t exactly setting the world on fire, but is right in line with others in the industry. Microsoft Corporation (NASDAQ:MSFT) and Dell Inc. (NASDAQ:DELL) pay shareholders 2.66% and 2.39%, respectively. International Business Machines Corp. (NYSE:IBM), another HP competitor attempting to transition beyond PC-related services and old-school IT hardware to burgeoning markets like enterprise services and cloud computing, pays a 1.84% dividend to it shareholders.
How’d HP do that?
The combination of a drop in most every business segment, a dying PC market, and its slow transition to new revenue sources, begs the question: “How’d Hewlett-Packard Company (NYSE:HPQ) beat expectations?” By aggressively cutting expenses, including Whitman’s planned 29,000 job reduction initiative by the end of next year and trimming costs across its business segments. The cost cuts are the right moves, and Whitman has been largely applauded for her efforts.
But here’s the thing; beating expectations based almost entirely on expense reductions, as positive as those steps have been and will continue to be, doesn’t bode well for investors in either the near or mid-term. Why? Whitman put it best on Hewlett-Packard Company (NYSE:HPQ)’s conference call, saying, “We need to do a better job growing the top line.” She got that right, too.
From here
What yesterday’s earnings call told us is that HP is still a long way from making the transition away from PCs to new business lines. Decent results in its enterprise group and enterprise services units — both were flat compared to fiscal Q1, though down significantly from last year — is fine, but doesn’t seem worthy of a double-digit spike in HP’s share price. Whitman is focused on shifting HP to the enterprise market, in contrast to Dell Inc. (NASDAQ:DELL), who is slashing prices in an effort to salvage a dying PC business.
Leaving no doubt of Hewlett-Packard Company (NYSE:HPQ)’s decision to not enter a PC pricing war with Dell, Whitman said, “You saw one of our competitors, Dell, completely crater their earnings. Maybe that’s what you do when you go private. We’re here to set this company up for the long term, not just get through this year.”
Like HP, Microsoft Corporation (NASDAQ:MSFT)’s share price is on a nice run of late, up over 28% for the year — 23% in the last three months alone. The difference, and the same applies to International Business Machines Corp. (NYSE:IBM), is that Microsoft’s further along in expanding revenue lines, including both cloud and mobile computing. Recent data from IDC puts Microsoft’s Windows Phone OS in the No. 3 spot, overtaking BlackBerry‘s OS. And with its Surface tablet and new cloud-based Office 365, Microsoft is quickly moving beyond its reliance on PC operating systems to drive revenue growth. About all you can say for HP right now is at least it’s beating its own expectations.
Whitman’s the right leader, and baby steps are being made, but it will likely be a year or two before HP really hits its stride. Fine for some long-term investors, but with Microsoft and IBM already making inroads in their respective business transitions, why wait?
The article Should You Buy What HP’s Selling? originally appeared on Fool.com and is written by Tim Brugger.
Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines (NYSE:IBM) and Microsoft.
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