Should I Buy HPQ Stock? 3 Pros, 3 Cons

Turnaround plan is in full swing, but hardware headwinds remain

   

Two years into CEO Meg Whitman’s aggressive five-year turnaround plan, Hewlett-Packard (HPQ) stock is soaring — up some 90% since the beginning of this year. But not everything is coming up roses for the old-school tech giant, given declines in its legacy hardware businesses — particularly on the consumer side of the house.

HPQ1 Should I Buy HPQ Stock? 3 Pros, 3 ConsHPQ is making some game-changing moves in a tough business environment — one reason that the IT giant’s fourth-quarter earnings per share of $1.01 beat Wall Street estimates by a penny last week. HP earnings exceeded analysts’ expectations on the top line as well — its $29.13 billion in revenue solidly beat the $27.91 billion consensus estimate.

Although the earnings flipped into the black after a massive loss for the same quarter last year, revenue fell by 2.8% — HPQ’s ninth consecutive drop, as InvestorPlace’s Tom Taulli explained

So is HPQ stock a buy now? Here are three pros and three cons:

Pros

Cost Cuts, Debt Reduction: Meg Whitman’s cost cuts continue to be a major element of HPQ’s restructuring strategy — a plan that ultimately could leave Hewlett-Packard with 34,000 fewer employees worldwide. This week, the company announced plans to cut more than 1,100 jobs in the U.K. The company has made debt reduction a priority this year, revealing in its earnings call that all of the company’s operating units with the exception financing are now in a zero-debt position.

3D Printing: So-called 3D printing is one of today’s most exciting and promising hardware trends, and HP’s Whitman is positioning her company to get a piece of the action. The technology essentially can fabricate a solid object of practically any shape from a digital model. At an industry conference in October, Whitman said HPQ will bring a 3D printer to market in mid-2014.

Superpod: As the shift to cloud computing and virtualized servers whittles away hardware revenues, HPQ is looking for new ways to cash in on that segment. Enter its “Superpod” initiative — a means of partnering with public cloud providers like Salesforce (CRM) to offer their customers the equivalent of a private cloud. HP is working with Salesforce to jointly develop and market a Superpod based on HPQ’s Converged Infrastructure within Salesforce’s data centers.

Cons

Shareholder Lawsuit: Just when we’d almost forgotten about HPQ’s Autonomy debacle, the fallout once again takes center stage. Last week, U.S. District Judge Charles Breyer cleared the way for a shareholder lawsuit to move forward against HP and CEO Meg Whitman. The suit stems from HPQ’s 2011 acquisition of Autonomy, a U.K.-based software company. Last November, investors were stunned to find out that HP took an $8.8 billion charge against earnings due to major misrepresentations — and fraud — involving Autonomy. The suit also alleges that Whitman herself misrepresented the health of Autonomy even as HP was combing through the books.

Macroeconomic Headwinds: HP has been weathering a tough IT environment in Europe that likely will persist into 2014. Now, slower demand in China may deal an even bigger blow to HPQ’s balance sheet. Hewlett-Packard’s peers like IBM (IBM) and Cisco (CSCO) are seeing softer demand in that all-important market as well. HP upped the ante in August by naming Robert Mao its first chairman for HP’s China business.

Declining PC Market: With the rapidly growing popularity of tablets and smartphones, it’s no surprise that HP’s laptop and desktop business is taking it on the chin. According to International Data Corp., PC shipments worldwide are expected to slip by more than 10% this year — HPQ must make up the difference in other ways. Although HP’s new tablets and lighter laptops are an important step in the right direction, this is a hotly competitive market that’s quickly becoming commoditized.

Bottom Line

HPQ’s earnings looked better than expected, and the cost-cutting focus is an admirable one, but Whitman still has an uphill climb in her quest to return the IT behemoth to its former glory. HP must quickly remake a PC-focused business into one that provides enterprise cloud infrastructure on the business side and tablet dominance on the consumer side compared to rivals like Amazon (AMZN), which is cutting cloud prices to the bone, and Dell (DELL), which has a head start in the tablet space.

So should you buy HPQ stock? No — while I believe Whitman’s changes can deliver further upside in 2014, I think the stock is ready to retreat from recent highs now.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2013/12/buy-hpq-stock-3-pros3-cons/.

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