All-Time Lows at HP: Windows 8 Marks a Turnaround

Weak demand for computers is evident everywhere this past quarter. Dell (DELL) and HP (HPQ) both reported weak results for personal computing sales. Over the last few quarters, management sought to write-down its acquisition, reduce headcount, and merge its printing and computing businesses. HP shares closed at $17.64 the day after the company reported quarterly earnings.

HP’s problems may be summarized as follows:

• Operating margins of 4.7%
• Printing shipment volume declines of 17% year-over-year
• Hardware sales down 23%

HP’s only bright spot was 18% sales increase in software, to $973 million.

Investors should also note the substantial difference between GAAP earnings and non-GAAP earnings forecasts. HP said its GAAP outlook would be a loss in the range of $2.23 to $2.25 per share. Using non-GAAP EPS, earnings would be a positive $4.05 to $4.07 in earnings per share.

Macroeconomic Weakness

Revenue from Asia Pacific dropped 7% year-over-year to $5.7 billion. HP managed to keep inventory channel inventory at acceptable levels. HP expects Europe and Asia to be a drag on its recovery, which will hurt margins by pressuring prices.

Windows 8 a Bright Spot

HP is set-up to benefit from a successful launch of Windows 8. Scheduled to be released in September, HP enters the quarter with lower channel inventory. HP is still positive for Ultrabooks and more importantly, Windows 8 tablets in the enterprise.

Investors looking at HP as an enterprise computing play would be rewarded in this segment. The challenge that remains is in the consumer space. Apple’s (AAPL) success in generating high margins for its products is hurting HP.

Is a computing refresh (for laptops, desktops, and Windows-based tablets) in the cards? Here are the companies that stand to benefit:

1. Hewlett-Packard Company (HPQ, Earnings, Analysts, Financials): Offers various products, technologies, software, solutions, and services to individual consumers and small- and medium-sized businesses (SMBs), as well as to the government, health, and education sectors worldwide. Market cap at $33.94B, most recent closing price at $17.21.

2. Dell Inc. (DELL, Earnings, Analysts, Financials): Provides integrated technology solutions in the information technology (IT) industry worldwide. Market cap at $19.53B, most recent closing price at $11.12.

3. Microsoft Corporation (MSFT, Earnings, Analysts, Financials): Develops, licenses, and supports a range of software products and services for various computing devices worldwide. Market cap at $257.29B, most recent closing price at $30.69.

4. Intel Corporation (INTC, Earnings, Analysts, Financials): Engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. Market cap at $124.27B, most recent closing price at $24.84. Intel has a solid track record in boosting margins. The company lowered its outlook due to weak macroeconomic conditions.

5. Advanced Micro Devices, Inc. (AMD, Earnings, Analysts, Financials): Operates as a semiconductor company in the United States, Japan, China, and Europe. Market cap at $2.72B, most recent closing price at $3.85. AMD sells budget processors, but is struggling to compete with Intel.

6. Seagate Technology PLC (STX, Earnings, Analysts, Financials): Designs, manufactures, markets, and sells hard disk drives for the enterprise, client compute, and client non-compute market applications in the United States and internationally. Market cap at $13.45B, most recent closing price at $33.85. Storage makers would see a boost in demand with system purchases and upgrades.

7. Western Digital Corp. (WDC, Earnings, Analysts, Financials): Engages in the design, development, manufacture, and sale of hard drives worldwide. Market cap at $10.83B, most recent closing price at $43.79.

8. SanDisk Corp. (SNDK, Earnings, Analysts, Financials): Designs, develops, manufactures, and markets NAND-based flash data storage card products that are used in various consumer electronics products. Market cap at $10.37B, most recent closing price at $42.95. Solid state drives boost the performance of computers.

9. NVIDIA Corporation (NVDA, Earnings, Analysts, Financials): Provides visual computing, high performance computing, and mobile computing solutions that generate interactive graphics on various devices ranging from tablets and smart phones to notebooks and workstations. Market cap at $8.89B, most recent closing price at $14.35. A large part of sales comes from desktop graphics cards for NVIDIA.

Written by Chris Lau. To interact and discuss these picks with users, attach your watch list or portfolio to your friends on Kapitall. Message the author. He is ranked #5 (by points) on the all-time leaderboard. The leaderboard is located on your score icon -> Leaderboard.  Members on Kapitall earn free points that may be redeemed at the Kapitall store.

Disclosure: No position in HPQ or in any of the stocks mentioned in this article.

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