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Shares of Hewlett-Packard (HPQ Free Hewlett-Packard Stock Report) fell sharply after the struggling computing company and Dow-30 component detailed its turnaround strategy and offered an outlook for fiscal 2013 (ends October 31, 2013) at its annual meeting for securities analysts in San Francisco. Chief Executive Officer Meg Whitman's strategy hinges on a number of key initiatives. These include cutting costs, reducing the number of product offerings, and transforming the company into more of an enterprise computing provider, along the lines of International Business Machines (IBM Free IBM Stock Report). Ms. Whitman wants to expand in areas that are driving IT investment, such as cloud computing, information optimization, and data security.

While investors may be fine with the overall strategic vision, they were clearly disappointed with the length of time it will likely take for these initiatives to bear fruit. Indeed, management noted that it is on track to deliver savings targets and complete its restructuring by the end of fiscal 2014. By fiscal 2016, revenues are expected to be growing in line with GDP; margins ought to be wider; and operating profits should be expanding faster than sales. 

While this is all well and good, getting to that point will probably take the company down a bumpy road. Technology spending has sputtered, and Ms. Whitman cited vast turnover in executive leadership as another reason for the drawn-out turnaround process. The company's outlook for fiscal 2013 seemed to hit home with investors, as it was much weaker than most on Wall Street had expected. Indeed, management forecast per-share GAAP earnings to land between $2.10 and $2.30, which was well below our $2.80 call. (The non-GAAP range, which excludes writedowns, is now $3.40-$3.60 a share.) The outlook for enterprise services was especially disheartening, as this is one of HP's largest divisions and an important part of its turnaround plan. Revenues here are expected to decline 11%-13% next fiscal year, and the segment will probably just eke out a profit with operating margins likely to be no more than 3%. All told, we continue to think that all but patient and somewhat aggressive investors may want to defer commitments here.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.