Hewlett-Packard: Will The Turnaround Pay Off?

HP logoHewlett-Packard Company (NYSE:HPQ) has been struggling for the past several years. The company had to oust two CEOs before Meg Whitman joined HP in 2011. Recently, Hewlett-Packard wrote down $8.8 billion on the acquisition of Autonomy Corp. The Palo Alto-based company’s sales are dwindling, and the stock has plummeted from the highs of $50 to just above $20 today. Hewlett-Packard Co. faced a big blow when it was ousted from the Dow Jones Industrial Average.

Turnarounds in the rapidly evolving technology sector are extremely challenging. We have already seen two giants, Nokia and BlackBerry, biting the dust. Even though HP is trying to address its problems, it has failed to show any strong signs of recovery amid fierce competition. It’s been two years since Meg Whitman began implementing her 5-year turnaround plan. Will her efforts pay off?

 

Troubles of HP

The company’s PC and printers business has seen consistent decline as consumers increasingly turn to tablets and smartphones. According to research firm Gartner, Global PC shipments declined 8.6% during the third quarter to 80.3 million units. Though almost every PC maker suffered from the contracting demand, many of HP’s competitors such as Samsung and Lenovo were smart enough to foray into smartphone and tablet markets. HP doesn’t offer smartphones, and it has little presence in tablets space yet.

HP’s enterprise business, which posted a revenue of $55 billion last year, is also declining. Enterprise customers rarely switch their providers. IBM Corp., Oracle and Cisco are already dominating this space. That leaves little room for Hewlett-Packard.

Another big trouble for the company is that its long-time partners Microsoft and Intel are turning into direct competitors. For years, HP has relied on Microsoft Windows and Intel microprocessors. But now Microsoft is reaching customers directly with Surface tablets. Meanwhile, Intel Corp. has been helping companies like Facebook and Google build their servers, eliminating the need for HP servers.

 

Financial Position

Recently, HP shares surged as much as 9% after CEO Meg Whitman said she expects the company’s sales to stabilize in 2014. Despite her optimistic comments, analysts expect HP’s net sales to plunge 3% to $107.6 billion in 2014. Whitman expects earnings between $3.55 and $3.75 per share, compare to the consensus estimate of $3.61 a share.

Sales for the current year are expected to fall 7.8% to $111 billion, according to analysts polled by Bloomberg. HP expects to generate about $8 billion in free cash flows in 2013. Currently, the company pays a quarterly dividend of 15 cents per share, or 2.6% yield. HP said it will spend return at least 50% of the free cash flow to shareholders in the form of dividends and stock repurchases.

 

Meg Whitman’s Turnaround Strategy

After replacing Leo Apotheker as CEO, Whitman has focused on innovation and effective management. In a recent interview, Meg Whitman said HP’s sales team lacked modern tools and IT infrastructure, and the company’s operations were horrible when she joined the company. Two years into her five-year turnaround plan, HP has taken some bold moves. As Microsoft and Intel turned into direct competitors, HP began to lower its reliance on them. The company has launched several devices with Android and Chrome OS. And a host of its devices are powered by AMD and Nvidia microprocessors.

HP has no presence in smartphone markets, so it has to strengthen its core PC business to remain a leading hardware vendor. Shifting to Chrome OS will give customers more choice at affordable prices. The Chromebook 11 is available at $279. HP has also announced to launch Chromebook 14, which has a battery life of 9 hours. It costs $349.

Meg Whitman has also unveiled HP’s first high resolution tablet Slate 8 Pro, which is expected to hit the stores in November. The 8-inch tablet comes with 2GB RAM, Nvidia Tegra 4 processor and a 1,600×1,200-pixel resolution. The company also launched new Slate HD and Slate Extreme running on Android.

In the server market, HP is the second largest vendor after IBM with 26% market share. Servers represent an important opportunity for HP as the market witnesses renewed growth due to rising demand for microservers and cloud computing. IHS iSuppli Research said that server demand for cloud computing will double from 2012 to 2015. Microservers are expected to growth at more than 60% for the next four years. Exploiting this opportunity, Meg Whitman launched the Moonshot servers that combine the big data, cloud and virtual server capabilities.

Meg Whitman has come up with some excellent products with the right pricing strategy. She has also launched a number of new printers with ePrint features that produce excellent quality documents at a faster rate, while using half the toner of lasers.

 

Conclusion

HP has been in trouble for the past several years, though it remains profitable. Meg Whitman has taken the challenging task to turn around a company as complex and large as Hewlett-Packard. The new Android tablets, Chromebooks, servers and printers show that she has taken steps in the right direction. Though the stock has been plummeting due to falling sales, HP still has enormous resources and talent. That, coupled with Meg Whitman’s efforts ensure that HP will stabilize and start growing again in the years to come.

What are your thoughts on the future of Hewlett-Packard?

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  • http://www.krantcents.com krantcents

    The PC market is changing and the management should be ahead of the curve! I am not sure HP is ahead of the curve.