Should You Buy HPQ Stock? 3 Pros, 3 Cons

Meg Whitman delivers results, but Hewlett-Packard turnaround still faces headwinds

   
Should You Buy HPQ Stock? 3 Pros, 3 Cons

Just more than two years months into CEO Meg Whitman’s five-year turnaround plan at Hewlett-Packard (HPQ), solid third-quarter earnings released this week show that the IT giant is beginning to recover, in large part because of dramatic cost cuts and stronger PC hardware sales.

hewlett packard Should You Buy HPQ Stock? 3 Pros, 3 ConsBut even though HPQ stock bounced more than 5% Thursday, headwinds remain for the 75-year-old technology giant.

Hewlett-Packard did report $27.6 billion in revenue after market close on Wednesday — its first sales growth since 2011 and better than analysts’ expectations of $27 billion. The company attributed the revenue gain to stronger-than-expected PC sales which gained 12% overall and were driven by a 17% rise in notebook sales.

On the flip side, HPQ earnings came in at just 89 cents per share, down 29% compared to the year-ago period and merely in line with Wall Street’s (typically easy) estimates.

Those mixed results beg the question: Should you buy HPQ stock right now? To see, we look at three pros and three cons of the stock.

HPQ Stock Pros

Meg Whitman’s Turnaround Plan: Given Hewlett-Packard’s progress since the five-year turnaround plan was launched in May 2012, many HPQ stock holders are thankful that Meg Whitman lost her race for governor of California in 2010. That defeat made Whitman available to take on the herculean task of transforming HP from a PC-and-server hardware company into a more agile competitor that could compete for next-generation cloud, Big Data and software by reviving HPQ’s research and development activities.

HP Sales Grew for the First Time Since 2011: HPQ surprised most analysts by reporting overall sales growth, driven in large part by the sale of PCs to consumers and businesses. The PC sales lifted revenue of Hewlett-Packard’s Personal Systems unit to $8.7 billion in the third quarter — a 13% increase year-over-year.

Fundamentals Accentuate HPQ Stock Value: HPQ stock has gained 27% year-to-date and still trades at just 9.5 times next year’s earnings, which compares well with its rivals in the sector. Hewlett-Packard also boasts a strong cash position. During the third quarter alone, HPQ delivered free cash flow of $2.7 billion — so far this year it has generated $7.4 billion in free cash flow — and the company now sits on $14.5 billion in cash and cash equivalents. And Hewlett-Packard uses its cash, making a conscious effort to boost shareholder value through dividends (it yields a modest 1.9% currently) and share repurchases.

HPQ Stock Cons

PCs Are Becoming an Endangered Species: Despite Hewlett-Packard’s impressive PC sales growth — particularly the strength in notebooks — the long-term fortunes do not favor HPQ’s PC business. Although worldwide PC shipments reversed two years of declines last quarter, growth still was a tepid 0.1%, according to IT research company Gartner. HP’s printing unit revenues were down 4% year-over-year as well; both factors make it all the more critical for the company to deliver big gains in enterprise services and software.

Software and Enterprise Services Weigh on Profit: In the third quarter, however, enterprise services revenue was down 6%; software sales slipped 5%. Eventually, HPQ’s launch of leading-edge technologies and applications will be a driver of revenue growth and profits, but as HPQ realigns its focus in the near term, the company will buy time by cutting costs — and labor is a huge cost. In May, Whitman said she would cut between 11,000 and 16,000 jobs — in addition to the 34,000 jobs announced earlier. However, Whitman is walking the proverbial tightrope — cutting costs deep enough to grow margins while not losing the talent that will deliver the “next big thing.”

The Autonomy Fiasco: Meg Whitman must work through the fallout of one of former HP CEO Léo Apotheker’s worst tactical errors — the $11.1 billion purchase of British software vendor Autonomy in 2011. In December 2012, HPQ wrote off $8.8 billion, in part over allegations of dodgy accounting at Autonomy. Predictably, the fracas has degenerated into name calling, dueling lawsuits and investigations by U.S. and U.K. regulators.

Verdict

As NFL head coaches are fond of saying, it’s not enough to start fast — you also need to finish strong.

Meg Whitman has started fast, but at a time when the entire information technology sector is in flux — or chaos — HPQ might need another new playbook to take the company to the next level.

So should you buy HPQ? No — for now, the potential for meaningful growth still seems too doubtful.

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


Article printed from InvestorPlace Media, http://investorplace.com/2014/08/hpq-stock-buy-sell-meg-whitman/.

©2014 InvestorPlace Media, LLC

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