Shareholders applauded Hewlett-Packard's (HPQ - Free Hewlett-Packard Stock Report) April-period earnings performance after the computer company, a Dow-30 component, reported lower second-quarter (fiscal year ends October 31st) earnings that nonetheless beat its forecast. Indeed, these shares are up big on the news, reaching a 12-month high in the process. In all, they have nearly doubled in price since their 12-month low last fall when the company, under its CEO Meg Whitman, launched its turnaround strategy.
H-P reported earnings of $0.55 a share for the April term, down from the $0.80 it logged in the year-earlier period, but better than its previous outlook of $0.38-$0.40 a share and our estimate of $0.38. Reported earnings for the second quarter of fiscal 2013 included $0.32 a share of restructuring, acquisition, and intangibles expenses.
Revenues fell 10% year to year. The decline was experienced in all of H-P's product segments, with pronounced weakness in personal systems. Notebook computer sales plunged 24% and desktop computer volume dropped 19%. To be sure, the entire personal computer market has contracted, and H-P faced a tough comparison since sales in the year-earlier period got a boost when the hard disk drive industry came back on line following the flooding in Thailand. Personal systems margins contracted year to year, reflecting aggressive pricing by competitors, we suspect mostly by Dell, which has been struggling. But PC margins improved slightly from the January period.
Meanwhile, the printing segment's sales slipped only 1%, aided by an increase in printing supplies, and printing margins widened, reflecting H-P's focus on selling higher-value units and supplies. The company expects to benefit in the second half from the decline in the value of the Japanese yen, but this positive may be offset by more aggressive pricing by Japanese printing vendors.
Enterprise products sales (servers, storage systems, networking products) fell 10% in the period, and the margin contracted, despite positive mix changes from services. H-P's entry-level products struggled, and a transition away from its traditional storage product portfolio hurt sales. In Enterprise Services, sales fell 8% but margins improved from the January term. Accounts that were expected to run off in the April term are taking longer to do so, but the company says it is making progress addressing underperforming contracts.
Meanwhile, operating cash flow rose 44% in the quarter, and the company reduced its debt by $1.8 billion sequentially. It expects to repay another $1.75 billion of debt shortly, part of an ongoing effort to rebuild its balance sheet.
Looking ahead, H-P expects to report earnings of $0.56-$0.59 a share in the July period, and $2.50-$2.60 for all of fiscal 2013, including $1.00 a share of restructuring and acquisitions costs. We've increased our share-net estimate for fiscal 2013, from $2.15 to $2.50. Management expects Europe's economic problems and slower growth in China to pose challenges. The personal systems market, particularly for notebook computers and in Europe, is expected to remain especially weak. Too, large enterprise services contracts are now expected to run off in the second half of fiscal 2013, and are likely to depress sales in that segment. But companywide efforts to improve H-P's execution and the increased focus on higher-value offerings should support a little more margin improvement over the balance of the fiscal year.
By next fiscal year, with a lot of the easier margin fixes behind it, we figure H-P's recovery pace will depend more on its ability to rekindle sales growth and will probably slow down. Too, sales in Europe and China could weaken further. Nonetheless, we've tentatively raised our share-net estimate for next year, from $2.40 to $2.60.
H-P's recovery is still a work in progress and the stock is not suitable for conservative investors. But the company made more headway than expected in the first half of fiscal 2013, and more aggressive investors who are also very patient may want to consider the shares for the 3- to 5-year pull. The issue's total return potential to 2016-2018 is enhanced by the decent dividend yield, based on a payout that was just raised, from a quarterly rate of $0.132 to $0.145.
About The Company:Hewlett-Packard provides computing and imaging solutions and services to consumers and businesses. The company operates in six segments: Imaging & Printing (20% of 2012 revenues), Personal Systems, (29%), Enterprise Storage & Servers (17%), Services, (28%), Financing (3%), and Software, (3%).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.