H-P's Turnaround Rings True

Overall operating profit in the fourth quarter was 7.6%, up from 7% in the year-ago quarter. While the operating profit dipped in the printer business -- to 13.2% from an unusually high 16.6% a year ago -- margins grew in other areas such as personal systems. And H-P's troubled software business went from a loss to a profit that was 8.7% of revenue.

But nobody invests in what a stock has done in the past. It's about what a stock is going to do in the next few months, at least. So, can H-P deliver a strong second act? As is the case with turnarounds, the bulk of the gains that H-P has seen have come from righting itself. With a historical P/E ratio of 36, the expectations are that the tech giant will have reason to grow profits once the restructuring has run its course.

One encouraging sign is that H-P is finally moving beyond its dependence on its core printing business for generating profit. In four years, H-P estimates that the digital press market will grow 26% a year to $4.4 billion, while the large format printer market will expand 9% a year to $8.2 billion. That's fine, but faster growth rates are likely to come from other areas, such as storage and services.

In the past, it seemed like H-P was shoring up printer profit to keep the entire ship running. In the fourth quarter of 2004, 73% of the company's operating profit came from the printer business. Last quarter, it was only 52%, still a large portion but reflective of the effort that Hurd has made to make the other lines of business more profitable. Printers make up only 30% of H-P's revenue.

All of this is a tall order. In addition to returning operational efficiency to the company, Hurd must reignite revenue growth -- most likely by strengthening its lead in the storage market. But thanks to the legacy of the Fiorina years, he has lots of room for improvement.

In other words, after paying Fiorina $14 million in severance to go away quietly, H-P has reaped roughly $28 billion in increased market value. Not a bad return on what appeared at the time to be an overpriced payment.

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