Why Meg Whitman's Ascent to Chairman of HP Signals New Beginning

NEW YORK (TheStreet) -- If there was ever any doubts as to who's running the show at Hewlett-Packard (HPQ) they were put to rest Thursday when CEO Meg Whitman added the title of "chairman" on her resume.

Whitman replaces Ralph Whitworth, who stepped down due to health issues.

Hewlett-Packard continues to be one of the best stories on the market in 2014. Shares are up 33% over the trailing 12 months and are up 24% year-to-date, outperforming the tech sector's 9% gains. The stock closed Thursday at $34.43, just 2% away from its 52-week high.

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Meg Whitman has been the reason for Hewlett-Packard's resurgence. That she was chosen for chairman is a much-deserved vote of confidence. The company has kept both the CEO and chairman roles separate ever since the departure of former CEO Mark Hurd in 2010. Shares are still down 36% from their 2010 high.

But it's time to look forward. With Whitman now fully entrenched in HP's fabric, investors should expect continued improvements in both the company's revenue and profits.

The new title is nice to have. But it doesn't change anything with respect to Whitman's vision of efficiency and finding new growth areas. Operational expenses will continue to be trimmed and Whitman does not plan to rest until Hewlett-Packard plants its flag in more profitable areas such as software and services.

With the recent enterprise partnership forged between rivals Apple (AAPL) and IBM (IBM) Whitman's vision of enterprise services growth is only going to get harder.

IBM's deal with Apple was a surprise to market observers. Ginny Rometty, IBM's CEO, who also holds the role of chairman, has been under similar pressures to return IBM to growth. Like Whitman, Rometty has had a tough time breaking ground in new era of tech that's embracing cheaper cloud alternatives from Amazon (AMZN) and Salesforce.com (CRM).

Unlike her predecessors Whitman has never promised the moon. From the first day of her arrival, she has demonstrated that she understands the company's strengths and weaknesses. Even as improvements began to show in the company's bottom line, she has maintained that the turnaround will be a long-term endeavor.

Although the company has been in a strict cost-cutting mode, I think it's time for a change. And with a stabilized PC-shipment environment, Whitman should consider striking while the iron is hot. A conversation with Google (GOOGL) or Amazon should be considered.

Google has always had ambitions of growing Android in the enterprise. And Amazon needs a route to make Kindle Fire tablets function as more than just "play things."

Then, of course, there is Microsoft (MSFT), HP's long-time OEM partner. Microsoft's enterprise position is now being threatened by both Apple and IBM. Whitman should make a call to Satya Nadella and rekindle old relationships by offering to sell Windows phones and Surface tablets in exchange for cloud/software synergies. Everybody wins.

Whitman, by virtue of her added power, is now in a position to dictate Hewlett-Packard's course in ways that might never have been considered prior to her new title. Apple and IBM's unprecedented deal just made it easier.

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.

TheStreet Ratings team rates HEWLETT-PACKARD CO as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate HEWLETT-PACKARD CO (HPQ) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 30.54% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • HEWLETT-PACKARD CO has improved earnings per share by 20.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, HEWLETT-PACKARD CO turned its bottom line around by earning $2.62 versus -$6.45 in the prior year. This year, the market expects an improvement in earnings ($3.71 versus $2.62).
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Computers & Peripherals industry and the overall market on the basis of return on equity, HEWLETT-PACKARD CO has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
  • The gross profit margin for HEWLETT-PACKARD CO is currently lower than what is desirable, coming in at 27.20%. Regardless of HPQ's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, HPQ's net profit margin of 4.66% is significantly lower than the industry average.
  • Net operating cash flow has decreased to $2,995.00 million or 15.77% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.

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