HPQ Q2 – The Meg diet

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Austerity buys time for a proper strategy to be formed.

  • HPQ posted good Q2 results and guided nicely as the cost cutting plan began to show results.
  • Q2 Revenues and EPS where $27.6bn / $0.87 compared to consensus at $28.0bn / $0.81.
  • Revenues from the PC segment where the real culprit for the top line falling 20% YoY to $7.58bn.
  • This was in part exacerbated by aggressive actions on the part of Dell to hang onto market share with inferior products.
  • HPQ declined to participate in a price war and so share was lost.
  • Dell caused problems this quarter but in reality the real danger is coming from Samsung, Asustek and Lenovo.
  • These vendors have a proper strategy in place and are much better positioned to thrive in the new market that the PC industry has become.
  • It is here that HPQ must focus its attention as Dell does not represent much of a threat to HPQ in the longer term.  
  • The real story was cost cutting where 29,000 positions are being eliminated to eradicate the inefficiency that has been endemic to this company for many years.
  • Consequently operating cash flow also grew by 42% YoY and due to a substantial reduction in capex, free cash flow grew 100% YoY.
  • Guidance was positive with Q3 EPS $0.84-$0.87 compared to consensus of $0.83
  • This combined with relief that the damage from the PC market and Dell’s predations were not worse, drove the shares up 14% in after-hours trading.
  • These results have all the hallmarks of a company teetering on the edge of long term decline.
  • To HPQ’s credit, it is showing good progress on fixing the company to face the very difficult environment it faces.
  • However, it is doing this by cutting investments and this raises concerns about a recovery to revenue growth in the longer term.
  • I suspect that HPQ cutting investments because it has not yet really decided what it wants to invest in for the long term.
  • HPQ is currently sitting at a strategic cross-roads and needs to decide what it wants to become and how it will show growth once again.
  • Meg is buying HPQ time through a stringent diet but there is still no clear picture as to what HPQ wants to become and how it intends to show sustainable growth.
  • The stock remains inexpensive and there is enough cash for a the formation and execution of a properly considered strategy but shareholders will not wait forever.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.