HP Earnings: "Decent" Won't Cut It
Aug 27th 2012 5:53PM
Updated Aug 27th 2012 6:02PM
Hewlett-Packard (NYS: HPQ) announced quarterly results last Wednesday. You'll want to sift through the highlights carefully if you believe the company is in turnaround mode. Taking the newest numbers into consideration may actually change your mind.
Sales were down $1.5 billion to $29.7 billion, failing to meet analyst expectations of $30.2 billion. It also reported earnings of $2 billion for the quarter, which comes out to an adjusted EPS of $1.00, beating the $0.98 adjusted EPS figure analysts were expecting.
But what exactly does the "adjusted" EPS figure mean? Well, it doesn't include the nearly $11 billion in writedowns that would otherwise mean HP lost $8.9 billion for the quarter. I can understand wanting to adjust those results, which CEO Meg Whitman euphemistically termed "decent."
To be fair, investors knew these writedowns were coming; the majority of them were from an $8 billion writedown resulting from the $13.9 billion buyout of Electronic Data Systems four years ago. Essentially, HP overpaid by $8 billion for a single acquisition, and the company has to acknowledge this on its balance sheets. The stock took a beating after the report and closed the week 8% lower than Wednesday's closing price.
No wonder the company is trying to trim costs, cutting 27,000 jobs by 2014. Full-year earnings guidance was also at the low end of previous outlooks, as management cited "soft" demand in PCs and printing.
HP is trying to shift its operational strategy to focus less on PCs and printers and more on higher-margin IT business segments, but it's a slow transition. Dell (NAS: DELL) is trying to do the same thing, mostly because companies like HP and Dell don't have a choice. The PC market can no longer be relied upon for solid growth, and if you weren't a first mover in the promising tablet or mobile markets, you have to play catch-up.
While there's nothing wrong with moving into higher-margin tech solutions segments, it says a lot about HP (and Dell for that matter) that it's only doing this now, when it finds itself in dire straits. While I think it's the right move, and both Dell and HP will continue to find it profitable, it's just another example of the "follow the herd" mentality. Companies such as IBM (NYS: IBM) have been in this market for decades, which is a pretty substantial head start. In that time, IBM has become a trusted and well-respected expert in the tech services industry, and building strong, established relationships with its customers.
There were at least some positives for HP shareholders. Free cash flow was $2.1 billion, management raised the dividend 10% during the quarter, and the company also bought back $365 million worth of stock.
A word of caution
From a valuation standpoint, HP and Dell shares both pose the same threat of tricking investors into thinking the stock is cheap. Both stocks trade at a P/E multiple right around 7. On the face of it, it sounds like these stocks could be great opportunities for value-oriented investors. But these companies are participants in a declining PC market; it would be good to see them definitively prove their competency in another business line before you consider investing in their future.
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The article HP Earnings: "Decent" Won't Cut It originally appeared on Fool.com.Fool contributor John Divine owns none of the stocks mentioned in the story above. He is a fan of the song "I've Been Working on the Railroad." You can follow him on Twitter, @divinebizkid, and on Motley Fool CAPS, @TMFDivine.Motley Fool newsletter services have recommended creating a synthetic long position in IBM. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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