Hewlett-Packard Company (HPQ): Is This Earnings Rally Justified?

In my recent articles I have discussed the predicament of Hewlett Packard Company (NYSE:HPQ). The company has gone from being the biggest printer and PC manufacturer to one of the most disliked companies in the stock market. This ‘fall’ is due to a number of factors, but the rise of handheld devices is one of the primary reason behind the troubles of HP. The increased usage of smartphones and tablets has affected both the printing and PC industry. The recent PC figures by Gartner are not a good sign for the future of the PC industry, but there is hope that Ultrabooks can rescue the falling sales. If there is any possibility of this turnaround, Microsoft Corporation (NASDAQ:MSFT)’s Windows 8 will have to play a major role.

Earnings

HP reported its 1QFY13 results last week. The market was expecting HP to report an EPS of $0.71 on revenues of $27.8 billion. The company comprehensively beat estimates by reporting a non-GAAP EPS of $0.81 and revenues of $28.4 billion. The healthy growth resulted in stock appreciation of 6.4% in aftermarket trading. The stock has depreciated approximately 40% in the last year, and despite stellar earnings it will have to do a lot more to restore investor confidence. Positives from the quarterly report include the stabilizing revenues from printer, improved cash position and better than expected Enterprise performance, with the decline limited at 4% y/y.

Net income saw a decline of approx. 16% y/y to 1.23 billion from $1.47 billion. This decline was fueled by declining margins and declining sales in the PC and printer business. During the quarter there was a revenue decline across all segments, with only the networking segment showing a meager 4% growth. This decline was the steepest in the PC segment with 8% followed closely at 5% by the printing segment. The cost cutting plan at HP is finally taking shape with the company planning to lay off another 29,000 employees in the next two years. Almost 15,000 employees have already left the struggling giant, which has been one of the reasons behind improving margins.

The misguided acquisition has left question marks on the once formidable cash hoard of HP. The street has been worried about the company being able to finance its turnaround efforts. The current quarter sheds a hopeful light on the cash position with the company reporting FCF of $2.06 billion, or $1.05/share. According to the sell side, the cash situation benefited from better receivables and $127 million in sales of PP&E.