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Turnarounds: How Long is Too Long?

Meg Whitman is into year three of her turnaround of HPQ

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Looking at the Hewlett-Packard situation, Whitman’s five-year plan appears to be working. In my opinion, five years is an unusually lengthy period of time given today’s business climate; however, you’ve got to look at where it was before Whitman took over to where it is today in order to understand why she deserves more time. Whitman’s plan was to take the first two years to stabilize the company, get it on better financial footing, and then kickstart its growth in 2014 and beyond.

In the last year HPQ has reduced its net debt by almost $8 billion and will finish fiscal 2013 with $8 billion in free cash flow. That’s a free cash flow yield of 17.4%, compared to 7.5% for IBM. At current prices, it could reduce its share count by 17% if it used all $8 billion to buy back its stock. It won’t, but it illustrates how much stronger it has become financially compared to two years ago. Like Jobs before her, it appears Whitman is getting HPQ profitable before preparing to blow off the doors with revenue.

Seeking Alpha contributor Paul Franke does a good job explaining why HPQ has become the best deep-value play in technology. He cites the fact Whitman has cut costs, stabilized its day-to-day business and figured out which businesses are worth growing and those that aren’t. In 2013, it has cut $3 billion in annual expenses from its income statement and brought its costs in line with sales. The company now has the chance grow sales while maintaining stronger margins and overall profitability. To that end, Franke believes $4 per share in earnings is possible by 2014. That would make HPQ dirt cheap at $24.

Bottom Line

Every turnaround is different.

Some, like Hewlett-Packard’s, are clearly more complicated than others. Forget the stock price when buying into a turnaround and instead focus on the CEO’s plan. Not everything is going to be executed immediately, nor is everything going to be a home-run success. All you really want to see are enough singles and doubles in each quarterly report to demonstrate that the company hasn’t forgotten the urgency.

If you’re Meg Whitman, 2014 is your year of reckoning. By the end of next year (Q3 and Q4) it must begin to show some revenue growth. If not, I’d move on.

Three years should be plenty of time in most cases. Anything more and you’re spinning your wheels.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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