HP: Whitman Continues to Prove Why She Was the Right Hire

NEW YORK ( TheStreet) - More than any other company on Wall Street, I've gone out of my way to give the benefit of the doubt to computer and printing giant Hewlett-Packard ( HPQ), regardless of its mistakes. What has always appealed to me about HP is its broad portfolio of products and services that spans every nook and cranny of the corporate enterprise.

Not only is HP the world's No. 1 PC maker by a decent margin over Dell ( DELL) and Apple ( AAPL), but it is also the leader in printing, besting Lexmark ( LXK), and growing its share in networking components to become a rival of Cisco ( CSCO). So the question has always been, why has it not been able to get its act together?

However, on Wednesday, the company reported better-than-expected results for its second-quarter, reminding investors that it is under new leadership and things are about to change. HP reported earnings per share of 98 cents a share on revenue of $30.7 billion -- beating analysts' estimates on both the top and the bottom line. Wall Street was expecting EPS of 91 cents on revenue of $29.91 billion.

The numbers were good, but not great. As much as I appreciate the progress and the strides that HP continues to make ever since Meg Whitman took over as CEO, I continue to keep things in perspective -- whether good or bad. Wall Street reacted favorably to the news and the stock shot up 10% during after-hours trading.

I think an earnings beat of any kind in this market climate deserves to be rewarded. However, I can't help but notice that on an annual basis, both revenue and EPS was actually down 3% and 21% respectively.

Be that as it may, it took excellent execution by Whitman under a considerable amount of pressure to deliver the performance that it did -- particularly in light of Dell's recent disappointment and Cisco's own less-than-stellar forecast for the coming quarter. From that standpoint, HP opted to play it safe and not divert too far from its rivals.

For Q3, it is forecasting earnings in the range of 94 cents to 97 cents a share -- slightly lower than the $1.02 a share projected by analysts. For the full year fiscal 2012, HP expects non-GAAP earnings of $4.05 to $4.10 per share.

It is refreshing that Meg Whitman seems to know exactly what ails the company and more importantly, she seems to know what it will take to get the problems fixed. While listening to the call, it was evident that she has placed her stamp on the company and appears to be more dedicated than her predecessor on improving HP's existing businesses. This as opposed to what had become the norm of concealing fundamentally flawed areas of the company's operation.

Bullish Case

One thing HP has done is combining both its PC and printing divisions and confirming it will begin eliminating 27,000 jobs in a cost-saving measure of as much as $3 billion to $3.5 billion by 2014.

As unsettling, if not dire, as things once looked for HP -- particularly with the rise and dominance of Apple coupled with the constant reminders of the death of the PC -- investors have to now be pleased to see the light at the end of the tunnel.

The word "stability" has never been a term that anyone could have used with a straight face to describe HP, especially considering the revolving door that has been the CEO chair over the past five years. However, there is now reason to suspect that the company deserves a chance to prove its worth in any portfolio -- particularly those looking for value.

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) and 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 and its TouchPad tablet, which it recently decided not to scrap.

Bottom Line

While it is still too early to proclaim the resurgence of HP, it is clear it has the management structure in place to get it to where it needs to go. As a longtime apologist for the company, I feel a sense of vindication. However, the more promising aspect is to see that the company has become ambitious and is executing toward its goals.

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 to 36 months. That said, a couple more quarters like this, it may come sooner than we think.
At the time of publication, the author was long CSCO, AAPL, MSFT and HP.