We’re a year and change into Meg Whitman’s reign atop Hewlett-Packard (HPQ) — near (or even at) the point where investors must decide if they’re buying what Whitman is selling. For HPQ stock, that’s improving revenues, a return to profitability and increasing dividends and buybacks in 2014.
After starting her tenure with one foot in the grave, achieving just one of those goals might have seemed impossible … but lately, Whitman has slowly but steadily turned HPQ around, and with it, Hewlett-Packard stock.
HPQ stock has rebounded almost 90% from its November lows under $12 per share. That’s thanks to a 60% year-to-date run for Hewlett-Packard stock — and that even includes a pullback in the past couple months. Plus, Whitman has even managed to raise HPQ’s dividend twice during her tenure, by about 20% total to 15 cents per share quarterly.
If you’re in Hewlett-Packard stock, the waters are about as calm as you’ve seen in years … but the future still looks choppy.
That’s because while H-P still is transitioning toward a more services and enterprise computing model, HPQ continues to be beaten about the head and shoulders over its continued role as a PC hardware supplier in an increasingly mobile-centric world.
Gartner data shows worldwide PC shipments in the third quarter declined nearly 9%, continuing a six-quarter trend that shows no sign of easing. If there’s any good news in the report, its that HPQ’s U.S. PC shipments grew 4.5% year-over-year.
But the continued shift to mobile devices offered by Apple (AAPL), Google (GOOG), Samsung (SSNLF) and others … that’s not going anywhere. It’s a “thing” — it has been occurring for years, and will continue for more years still. Thus, HPQ’s improvements in a shrinking market aren’t anything to crow about.
So, where will these new revenues and profits come from?
HPQ is working toward improving its lot in the mobile world, introducing tablets that run across both Android and Windows platforms. But while this is a necessary move to keep its consumer products relevant, make no mistake — this is a game of catch-up, and progress on this front could be too slow to matter.
More hopeful is HPQ’s shift toward the enterprise model in which it can provide clients with hardware, software and services across its entire product spectrum. There is a huge server install base from which to expand. But H-P has picked a difficult fight — the space is crowded, with Cisco (CSCO) and Oracle (ORCL) among the big competitors.
Point being, revenue growth could continue to be elusive for some time. Indeed, at a recent analyst meeting, Whitman’s investor slideshow indicated that HPQ’s year-over-year revenue drop that began in fiscal 2011-12 (down 7%) will “moderate” after FY2013 and “stabilize” in FY2014, with possible improvement finally coming in FY2015.
Profitability, however, is a different story.
Whitman’s relentless cost cutting and focus on the balance sheet is paying off in smaller expense lines. HPQ already has laid off around 28,000 of a planned 29,000 from the work force, and apparently the results are meeting with Hewlett-Packard’s approval — Whitman acknowledged the layoffs should end by next year.
In its most recent quarter (Q3), Hewlett-Packard posted $1.4 billion in net income — 40% better quarter-over-quarter, and a huge improvement over the nearly $9 billion, writedown-powered loss it took in Q3 2012. Couple that with full-year earnings guidance of $3.55-$3.75 per share that met with analyst estimates for $3.61, and the bottom line part of the equation — while still lower than adjusted earnings for 2012 — appears to at least be on track.
HPQ’s cash situation (as always) looks good. Despite taking a $12 billion loss in 2012, it still managed to pump out roughly $7 billion in free cash flow, plus it currently has another $13 billion in cash and short-term investments. Meanwhile, Hewlett-Packard expects free cash flow to hit $8 billion in fiscal 2013 — that’ll have covered the $1.1 billion or so in dividend payouts many times over.
Frankly, given H-P’s cash situation, shareholders should expect another dividend raise during the upcoming year.
While Whitman has been given a fairly long leash, that appears to finally be paying off in a steadier ship that includes a lot more believers than two years ago.
Generating better results on the top line will take more time, but with the business “right-sized,” we should at the very least expect better stability out of HPQ stock, as well as increasing payouts.
Because its consumer product lines are still swimming upstream, and because HPQ still is making a very large transition to the enterprise side, I couldn’t justify buying in right now. However, if I already had money in Hewlett-Packard, I’d let it ride.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long AAPL.