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At Meg Whitman's HP, Hope Springs Eternal

NEW YORK ( TheStreet) -- Hewlett-Packard (HPQ - Get Report) is a company investors want badly to love.

At its current market capitalization of more than $43 billion, you're still getting nearly $3 in annual revenue for each $1 of equity. That's the reverse of the normal tech company ratio. Microsoft (MSFT) is valued at more than three times sales.

The problem for HP is that it's barely profitable and not growing. By holding down costs CEO Meg Whitman has managed to eke out profits for the last three quarters, reaching 5% of sales for the quarter ending in July, but its numbers still look more like those of an old-line manufacturer than a tech company.

Whitman has held the line by cutting staff: 28,000 so far and more to come. Like Yahoo! (YHOO) did before, she's testing loyalty by forcing workers to come to the office.

Whitman has also firmed up the balance sheet. Debt is down about $8 billion over the last year, and free cash flow for the first three quarters came to $7 billion.

This is why hope springs eternal. Simply by saying she thinks her turnaround is taking hold at this week's analyst meeting, Whitman caused the share price to rise nearly 10% in one day. The shares are up nearly 60% so far this year, one of the best performances among big cap stocks. But apparently not enough to keep it in the Dow 30.

I have been a long-term bear on HP, but I've recently let up on it due to valuation and some recent moves. Hiring Bill Hilf, an open source advocate who ran the Azure cloud, from Microsoft, is a good move. Incorporating Leap Motion's gesture interface into its laptops is a good move.

The question is, are these enough to move the needle, to create organic growth and raise profit margins? It's hard to see that with Whitman insisting, at the same analyst meeting, that Microsoft is now her competitor rather than her partner.

And she's right about Microsoft. There's no longer a divide between hardware and software, or hardware and services.

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