HP Has Plenty of Problems and Few Solutions

NEW YORK (TheStreet) -- Shares of enterprise giant Hewlett-Packard (HPQ) have been on an incredible run. But it can't do business indefinitely in a weak PC environment. Management must address the company's cloud and mobile strategies. 

At around $32.45, its shares are up 16% for the year to date. Since the stock bottomed at $11.71 in November 2012, the company has seen its value soar close to 200%, reaching a 52-week high of $33.90.

But from a value investment perspective, is there any value left in a company struggling with growth?

No one's going to deny HP has taken some meaningful strides under CEO Meg Whitman. But the company's core businesses are  decaying and too much has been made about the so-called stability of the PC industry.

Whitman has offered some positive remarks and an upbeat outlook. But PC growth, which makes up roughly 30% of HP's sales, isn't coming back. Making matters worse, Microsoft (MSFT), a once-proud OEM partner to HP, just released its third iteration of its Surface tablet. This, in my opinion, effectively kills off any hope that PC's might pull-off a late-stage rally. It isn't going to happen.

To date, whether in hardware, software or in the enterprise, there has been no meaningful growth at HP. The company's services and software divisions, which accounts for 42% of revenue, reported a decline in the recent quarter. Business conditions have not been all that great.

At this point, it's a mistake for investors to assume that a return to growth, which is presumed in the stock price, is imminent. There's still quite a lot of work for Whitman to do to fully realize this turnaround. With a resurgent Cisco (CSCO) looking more confident, any plan Whitman comes up with won't be easy to execute.

Hewlett-Packard will report its fiscal second-quarter report Thursday. The Street will be looking for 88 cents in earnings per share on revenue of $27.4 billion, which would represent a year-over-year revenue decline of 1%. Analysts have grown more optimistic, however.

Since the February quarter, revenue estimates have grown by $26 million. On a full-year basis, the Street is projecting earnings per share of $3.71 on revenue of $111.15 billion. Full-year revenue is expected to decline 1%, while earnings it expected to grow by more than 4%.

For HP, profits haven't been an issue. In the February quarter, despite a 1% decline in revenue, the company still generated $3 billion free cash flow. The company is in the midst of drastic cost reductions, including layoffs. Management did what it had to do to generate a profit. That's all well and good.

But in terms of actual performance or revenue-driven profits, there was very little that's  impressed -- this is what investors should pay attention to on Thursday's conference call. What will be the long-term growth drivers of this company?

Management must address the company's cloud and mobile strategies. How will it operate amid the enterprise shift in software, servers and storage? These are the questions Whitman must answer to affirm why investors should believe in this stock for the long term.

At best, these shares have adjusted from their two-year low overreaction. But there has been very little to support the close to 200% gains, which can be considered an overcorrection the other way. Absent clear growth strategies to suggest that real value exist, HP is a decent short to the $25 level, or 23% lower.

At the time of publication, the author held no position in any of the stocks mentioned.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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