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HP Sales Fall Short: Investors Take Note

Chris Lau, Kapitall: HP reported declining sales in the last quarter – maybe it's time to reconsider this tech titan. 

When Hewlett Packard (HPQ) reassigned its head of enterprise hardware ahead of quarterly earnings, it was not a good sign. Sure enough, HP reported earnings that missed sales estimates and shares dropped nearly 15% for the week. It might be time to look at HP again.

[Read more from Kapitall: What Investors Should Know as Football Season Approaches]

Earnings rundown

HP earned $0.86 per share on revenue of $27.22 billion. Sales declined 8% from the previous year. PC sales continued to be a problem for HP, as sales dropped 11% compared to last year, due mostly to the 22% decline in the consumer division. Despite a design refresh for notebooks, sales still declined here by 14%. Needless to say, enterprise hardware sales dropped by 9%, due to a weakness in sales of business critical systems, x86-based servers, and storage.

But there are some bright spots. Free cash flow was $2 billion. And HP replaced its enterprise hardware chief with its COO, Bill Veghte. For fiscal 2013, the company expects earnings to be at the lower end of consensus, between $3.53 and $3.57 per share. At a recent price of $22.27, HP is valued at a forward P/E of 6.2.

Analysis

HP continues to be an inexpensive stock, but with lots of uncertainty ahead. The company has a solid cash flow, pays a dividend yielding 2.6%, and is in the midst of a multi-year transition. Investors with a longer-term investment time frame will be rewarded if the executive reshuffling improves operating efficiency. HP has many areas for potential growth, including the enterprise hardware and software space, tablets, laptop computing, and mobile computing solutions. 

Potential catalysts

Analysts might make calls to enhance shareholder value on October 9, by demanding a share buyback, another acquisition, or further cost cuts. A refresh to Microsoft’s (MSFT) Windows 8, code-named “Windows Blue” and due mid-October, could still improve demand for PCs. HP is valued at half that of Microsoft, measured by forward P/E (or “price of profit”):

In the near term, shares of HP might drift lower as investors digest the weak quarter. Looking further out, HP could be a bullish play for investors confident the company's turnaround plan is on track. 

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