Don't Dive Into Hewlett-Packard Just Yet

NEW YORK (TheStreet) -- Although I haven't led the charge proclaiming Meg Whitman's candidacy for CEO of the year, investors who bought Hewlett-Packard's (HPQ) stock at the beginning of 2013 have every reason to cast their ballots for her.

Not only are HP shares up well over 70% on the year, but they are up 115% when dating back to the lows of last November. But here's the thing: If you expand this reflective horizon back six additional months to May 2, 2012, the stock has traded flat, at best.

Other than a few cost-related improvements undertaken, I don't believe HP is any better off today than a year ago. Investors who want to place a bet expecting more gains are also wagering Whitman has completely turned things around.

But given the recent second-quarter results, there are still plenty of underlying issues that need fixing.

As with Nokia ( NOK), which has undertaken significant cost-cutting measures and other restructuring efforts, HP certainly looks thinner. Unfortunately, so does revenue, which declined again this quarter by 10% year over year and 3% sequentially.

PC revenue fell 20%. I wasn't surprised by this given the report released earlier in the quarter by IDC that worldwide PC demand had dropped 13%. Nevertheless, the struggles in HP's PC business were noticeably weaker than rivals such as Lenovo ( LNVGY), which posted only a slight year-over-year decrease in its PC business, which still led to Lenovo acquiring an additional 3% in global PC market share, according to IDC.

Meanwhile, although Dell ( DELL) was far from an outperformer, Dell's PC unit posted only a 9% revenue decline. While I'm willing to be a little patient here with HP for its PC deficits, there are other areas of the business that raise some red flags.

For instance, the 37% decline in Business Critical Systems was certainly discouraging. Not to mention the 3% decline in tech services. It certainly seems as if HP is losing share to Dell, which posted a 10% year-over-year increase in its enterprise division. For that matter, Dell managed 12% growth in its non-PC side of its business.

Unlike Dell, there was very little to be excited about with HP's performance, even though networking revenue was up 1%. I don't believe market leader Cisco ( CSCO) will be running for cover. Elsewhere, in areas such as servers, which fell 12%, it still seems as if HP is unable to capitalize on the weaknesses shown in this area by both Dell and IBM ( IBM).

In that regard, if HP is unable to gain traction when its main rivals are struggling, when is it ever going to happen? I've made the comparison above and it's worth repeating here -- cost-cutting can only take you so far. Although it did help boost HP's bottom line and advanced gross margins by 50 basis points, operating income still fell 13%.

I do question whether it's a good strategy for HP to turn away any business with the fear of sacrificing margins. Cisco went in entirely the opposite direction and offered its large customers what some analysts called "aggressive discounts" that helped Cisco close plenty of business this quarter.

Given the lower-than-expected segment numbers, I don't know if HP is in a position to turn away any business. This strategy works for IBM. But that's IBM. HP has not yet reached that status.

There are still pressing issues such as HP's mobile strategy and how it plans to become relevant in the realm of smartphones and mobile devices. Plus, I don't believe management effectively outlined the company's new growth markets and how they will propel the stock higher in the new tech age dominated by Apple ( AAPL) and Google ( GOOG).

The stock's resurgence suggests a postponement in HP's sentence to the glue factory. But I would caution investors about counting their chickens before they hatch. You have to consider HP stock has only recovered losses incurred over the past year. On balance, HP is still the same company with the same problems. It's only leaner.

At the time of publication the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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