Hewlett-Packard (HPQ) warned markets that it would see lower revenue, due largely to execution issues. HP shares reached a 9-year low. During an analyst day session, HP lowered its EPS (earnings per share) guidance to $3.40-$3.60. The previous analyst consensus was $4.18 per share. In the Enterprise Services, earnings will decline by between $0.29 and $0.35 per share.
Revenue from the Enterprise Services will now decline by around 13%. Hardware will contribute to a decline of $0.05-$0.12 per share. The only bright spot for HP was growth in software and in the printing division. Earnings from the PC market are expected to be flat.
HP’s CEO was cautious on computing demand from Europe and China.
Problems at HP are nothing new, and were in fact expected. Whitman, HP’s CEO, said in its last two quarterly earnings meetings that the turnaround at the company would take many years. The recovery would not happen in one quarter. HP has numerous challenges, even after cutting costs by lowering its workforce. HP gave up on finding growth in the tablet market after it dropped Palm’s WebOS abruptly. The exit in tablets also meant that HP had no position in the fast-growing smartphone market.
HP as a Value Play
HP may be viewed as a value play. Seth Klarman, who manages Baupost Group, is an extraordinary investor who has a long position in HP. He reduced his position in HP by 15%, but also has a long position in Microsoft (MSFT). HP’s value is in its PC, printer, and enterprise space. The company pays a dividend yield of 3.54% and has a forward P/E of below 4. At the upper-end EPS guidance, HP trades with a P/E of around 4.4.
If operational execution is HP’s only problem, then HP is a value play. Successfully streamlining its product line, which is only beginning now, would improve profits. Management can improve performance, which would translate to better earnings and a higher share price.
HP as a Value Trap
HP’s core businesses are in a decline. The company already shed costs, but the health of its printing business is declining rapidly. PC earnings may be flat, but margins are nearly negligible, and could get worse. Windows 8, when released, may not boost sales. Worse still is that its reliance on software for higher growth faces execution risks. HP also has no position in the mobile space, a sector that is partly to blame for declining desktop sales. If core business units fail to ever recover, then HP is a value trap.
Business Section: Investing Ideas
Investors looking for exposure to the PC market should add these companies to their watch list:
1. Hewlett-Packard Company (HPQ, Earnings, Analysts, Financials): Hewlett-Packard Company 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.
In the enterprise software space, there are better options than HP:
5. Oracle Corporation (ORCL, Earnings, Analysts, Financials): Develops, manufactures, markets, distributes, and services database and middleware software, applications software, and hardware systems worldwide.
6. Microsoft Corporation (MSFT, Earnings, Analysts, Financials): Develops, licenses, and supports a range of software products and services for various computing devices worldwide. A detailed analysis on Microsoft is available here.
In the enterprise networking space:
7. Cisco Systems, Inc. (CSCO, Earnings, Analysts, Financials): Designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology industry worldwide.
A weak printing business would be bad news for other print makers. Weakness for HP-alone might help them:
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