Hewlett-Packard (HPQ) earnings are set to be released tomorrow after the market closes. And the big question is whether or not Hewlett-Packard earnings will show that the the comeback story for HPQ stock is still intact.
Remember, Hewlett-Packard stock is up almost 80% year-to-date. And such impressive HPQ stock gains are a strong indication investors believe Meg Whitman’s turnaround is real.
However, with Hewlett-Packard earnings and revenues in the fourth quarter expected to decline year-over-year, one can’t help but doubt that HPQ stock can keep its climb going.
In fact, unless the Hewlett-Packard earnings report demonstrates some obvious pockets of strength, it’s unlikely a repeat performance in 2014 is possible.
Hewlett-Packard Earnings Expectations
Analysts expect the Q4 Hewlett-Packard earnings report to show revenues of $27.91 billion, a 6.8% decline year-over-year. Meanwhile, actual earnings expected to decline by 13.8% to $1 per share of Hewlett-Packard stock.
Yes, HPQ has delivered positive earnings surprises in three of the last four quarters, averaging 8.2% per beat. But the most recent Hewlett-Packard earnings report was the one miss. In fact, HPQ stock got knocked for a 13.5% drop Aug. 22 when it failed to beat the consensus estimate for the first time in several shots.
Since then, Hewlett-Packard stock has been able to regain most of that decline. But I’d still be hesitant to own HPQ stock prior to tomorrow’s earrings announcement considering what happened in August when the company failed to deliver an earnings beat.
China Could Hurt HPQ
Another thing HPQ stock investors should keep an eye on heading into Hewlett-Packard earnings? China. This is the area HPQ is likely to experience growth issues in 2014.
Forrester Research (FORR) consultant Fred Giron wrote a blog post on Nov. 19 that indicates most of the 8% growth in IT purchases in 2014 will go to local vendors. The result: Foreign companies like HPQ will suffer market share declines.
In fact, Cisco (CSCO) stock lost 11% Nov. 14 when it reported a 21% decline in revenue in emerging markets. HPQ stock could face the same fate if it delivers a bad report from those same markets. And more importantly, future revenues in those markets are likely to experience further falls in subsequent quarters.
Good News: Free Cash Flow
One good sign for Hewlett-Packard stock investors is the company’s financials. HPQ is excelling when it comes to free cash flow and debt. In the last seven quarters, Meg Whitman’s company has improved its free cash flow by approximately 41% to $9.7 billion over the trailing twelve months, while reducing its long-term debt by 35% to $17 billion.
Professional money manager Brian Gilmartin, who is long HPQ stock, points out in a Seeking Alpha blog post that HPQ stock is trading at just four times cash flow with a 2.3% dividend yield. That provides Hewlett-Packard stock investors with a good combination of income and value.
Bottom Line for HPQ Stock
Meg Whitman’s turnaround of Hewlett-Packard (and HPQ stock) is now into year four. Recently, I suggested that 2014 was her year of reckoning. HPQ must start growing revenue organically — although a game-changing acquisition wouldn’t hurt — in the next year in order for investors to continue supporting HPQ stock.
These next few quarters are … well … “put up or shut up” time.
If you’re one of the lucky ones who bought Hewlett-Packard stock in December 2012 when HPQ was trading below $13, I’d take some profits. But I do think it’s worth sticking around somewhat to see if Whitman can get the job done.
For those who bought in early 2011 when HPQ stock was almost $50 … that’s much more difficult situation to be in. That’s because HPQ has its work cut out for it — and tomorrow’s Hewlett-Packard earnings report may not be pretty.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
