HP: Undervalued and Preparing for Apple Assault

Updated with new analysis regarding HP's job cut announcement on May 17, 2012.

NEW YORK ( TheStreet) -- In a move that should not come as a surprise, Hewlett-Packard ( HPQ) has announced that it plans to eliminate as many as 30,000 jobs or 8% of its global workforce. How it plans to enact these layoffs remains to be seen. Although there are advantages to easing into it and being more deliberate, an option that will take more than 12 months, the company may also decide to conduct its cuts in massive quantities. However, what is certain is that it is once again committed toward raising shareholder value and competing more effectively with the likes of Apple ( AAPL).

As tough as it is to applaud job cuts, from an investment standpoint, the company deserves a considerable amount of credit for what is indeed a difficult decision -- and it would appear that Wall Street agrees by the sudden uptick in the stock upon the news. As conservative as I have been when appraising stock valuations, I will admit that I do tend to get that itchy trigger finger when I see companies that are trading considerably below their fair market value, particularly in the tech sector. Finding these gems not only requires a considerable amount of due diligence, but remarkably, sometimes they are easily overlooked even when they are staring investors dead in the face.

For many, the thinking is, since the market is presumed to be always right, why bother? But this is where investors often make the mistake of confusing "market sentiment" with "value" -- two entirely separate terms. I think this announcement now, along with some recent earnings, currently undervalues the stock by 60%.

Although HP's stock has languished for the better part of the past three quarters, the company's new strategic direction not only makes sense from the standpoint of its competitive leverage within the enterprise against rivals such as Cisco ( CSCO) and Dell ( DELL), but HP is now looking to take a bite out of Apple. And it has done this by trying to duplicate Apple's unified platform advantage -- hence the reason for these layoffs.

From that standpoint, not only is HP poised for tremendous growth over the next four years, but it has also positioned itself to increase its profit margins in a relatively short period of time. That said, it will require a considerable amount of patience to realize this value, but the company has recently shown a focus that I have not seen for quite some time.

How is it going to happen?

In an attempt to reduce costs while also seeking to improve its ability to innovate and produce products that appeal to consumers, Hewlett-Packard recently decided to consolidate its two most profitable businesses -- of which combined for almost $65 billion in sales last year, or over half of the company's revenue. Though the company initially described it as creating "go to market synergies" and placing a huge bet on lowering its CAPEX, I couldn't help but to notice the similarities as well as advantages offered with Apple's famed "ecosystem."

This move will allow HP to design future builds with initiatives and focus not only on its existing products but more importantly how these new products will work together. One of the market advantages from which Apple benefits greatly has always been the ease of a unified system. By having now merged the two businesses, Hewlett-Packard may be able to capitalize on some market opportunities that may otherwise not have been available. The cost savings is one thing and the synergies between the divisions is another, but it's clear that the company wants better relationships and designs between its PCs and printers. But the question is -- will Wall Street buy it?

In the onset, it was a challenge to assess whether or not that the company has done a good enough job of convincing investors that a new HP is on the horizon, especially when considering the revolving door that has become the company's CEO post. The market is now taking a "wait and see" attitude toward HP and I think that's a fair approach as new CEO Meg Whitman has a tall task ahead of her in not only executing correctly, but also erasing these clouds of doubt that continue to plague the company for its past transgressions.

Its cloud initiative

Speaking of cloud, the company has what is called "Converged Infrastructure" or essentially taking everything that is in the enterprise and offering collaborating solutions in a way to meet business efficiency. It is no secret that there are a significant number of corporations today that deal with what I would consider unfavorable IT infrastructure -- where the primary drivers consist of aging hardware, legacy architecture and complicated networks. When you add the fact that there is usually a vital need to manage the volume of data traffic on the network, it then becomes a hassle. As with Cisco, Hewlett-Packard is now another company that I think is well positioned to capitalize on increased data demand.

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Not only does HP offer solutions that meet the needs of the enterprise, but it has an added mobile advantage over Cisco from having acquired Palm several years ago and currently holds mobile patents. From that standpoint, one can argue that it now has the potential to match up pretty well with Apple since Apple does not have the network infrastructure advantage that HP has. This is what the company realizes and it's something that investors must consider when appraising future value -- particularly from a stock that has been beaten up to the degree of HP. And when you add the fact that the company first introduced its converge infrastructure two years ago, the company has an added advantage with its lead.

Windows 8 to the rescue!

Another reason to be bullish HP is the fact that the company is due to release its new line of Ultrabook machines in partnership with Intel ( INTC) that will be based on Microsoft's ( MSFT) Windows 8 platform. These are thin, light and powerful laptops that are not that far from Apple's popular MacBook Air.

HP is betting heavily on the success of this launch as a way to secure some market share from Apple and dispel notions of PC deaths. It is also hoping that Microsoft's release of Windows 8 generates an increase in sales of not only the Ultrabooks, but also its PCs as well as its TouchPad tablet, which it recently decided not to scrap.

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The transition is never easy whenever there is a change in leadership. For that matter I think it is fair to say that Whitman has not exactly wooed Wall Street in the first couple of quarters with HP under her watch. However, what is clear is that she has a firm handle on what the company's strengths and weaknesses are by having placed the majority of her focus and attention on learning how HP's business operates. So the question now is -- where does the company go from here? Or more specifically, what's next?

Bottom line

By its recent moves, it is clear that HP has high expectations and wants to take Apple head-on. How successful it will be in that endeavor remains to be seen. But investors have to certainly feel a sense of excitement to see that the company is as ambitious as it has become. From an investment standpoint, there is no reason to not expect 20% upside in the near term. With a P/E of 8, the stock trades at a huge discount to its future potential and a price of $40 is not entirely out of the question over the next 24 - 36 months. That said, investors must not make the mistake of expecting an immediate turnaround. This is going to take some time to realize.

At the time of publication, the author was long CSCO, AAPL, MSFT, INTC and held no positions in any of the stocks mentioned, although positions may change at any time.

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