There's no denying that the Hewlett-Packard Company (NYSE:HPQ) - largely under the initially-shaky guidance of CEO Meg Whitman, though former CEO's Leo Apotheker and Mark Hurd didn't exactly help - has been a train wreck of a company of late. What was once the world's second-most popular name in the personal computer industry completely whiffed when it tried to throw its hat into the smartphone and tablet ring, then decided to get out of the PC business and focus on more lucrative cloud industries, and then just a few months later decided to stay in the personal computer business after all. As it turns out, HP did neither very well in the meantime. Hewlett-Packard investors have watched revenue fall from 2011's peak of $126.8 billion to what will likely be a top line of $108.9 billion next year, and worse, shareholders have watched HPQ shares tumble from a price of $54 in early 2010 to a low of $11.35 late last year. There's no way of sugar-coating it: That's an investment disaster. Yet...
Not that Hewlett-Packard Company is completely out of the woods yet, but as is all too often the case, the sellers assumed a worst-case scenario that never materialized, beating down a stock that didn't deserve a beating (at least not the one it got).
To give credit where it's due, the market knew Hewlett-Packard was going to hit earnings turbulence by 2012 as early as 2010; that's when HPQ shares started a major slide. Eventually the earnings implosion pulled the company into the red, during the last two quarters of 2012, booking a per-share loss of $4.49 in Q3 and a loss of $3.49 for Q4.
How'd it happen? The losses in Q3 and Q4 partially stemmed from one-time writedowns, but sales declines didn't help. Though operating income was still positive, it was also still weaker on a year-over-year basis. Between a waning PC market, Hewlett-Packard's clear lack of commitment to doing it well (they're getting out of the biz, but two months later decide to stay in?), not putting a viable tablet computer into that race (we'll give HPQ a break on not coming up with a hot smartphone - that's a different ball of wax), and the fact that the cloud solutions opportunity hasn't been anywhere near as fruitful as it was supposed to be, earnings never stood a chance.
As they say, though, that was then and this is now.
The challenges still await, but now with almost two years of company experience under her belt, the oft-criticized CEO Meg Whitman seems to be finding a groove. The company's products also seem to be finding grooves in their respective lanes. In other words, the Whitman turnaround plans for HPQ are working... they're just taking time.
As (partial) evidence of that idea, look at last quarter's earnings from other PC makers. Dell fell short of estimates, and even the hyper-reliable IBM missed analysts' forecasts. Hewlett-Packard, however, beat its estimates. They weren't low-ball outlooks either. Though analysts expected less on a year-over-year basis, the outlooks only gave Hewlett-Packard room to let per-share profits fall from $0.98 a year earlier to $0.80 this time around. The company posted a per-share profit of $0.87, on the heels of measurable - albeit relative - success in the enterprise-level market.
One of the Whitman initiatives, called Moonshot, won't start to achieve material results until later this year after launching last quarter, and really won't hit its full stride until 2014. Moonshot is a project that should finally give the Hewlett-Packard Company a major weapon in the cloud services industry. At the same time, the Slate 7 (Android-powered) tablet for consumers as well as the business-oriented Elitepad tablet in the queue for the second half of 2013, getting HP deeper into that game than it's been able to get thus far. The tablets may well get traction too, as the tablet arena is actually getting more and more fragmented rather than less and less... opening the door to names other than Apple, Samsung, and Barnes & Noble's Nook. More traditional enterprise products and services are also getting traction. That sliver of the market can be slow to move, so the work Whitman was doing two years ago there is only just now starting to bear fruit.
These initiatives have given the Hewlett-Packard Company the kind of powerful weapons it hasn't had in years, making HPQ a turnaround stock worth a closer look. That forward-looking P/E of 7.04 isn't a pipedream; HP's got the tools and momentum it needs to book that projected profit of $3.68 in fiscal 2014. Based on the stock's bounce back to $26.00, some investors see the rebound that's coming. Most investors don't see it yet, though... which is where the opportunity presents itself.
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