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Will Hewlett-Packard Company (HPQ) Continue to Rally?

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The recent spike in shares of Hewlett-Packard Company (NYSE:HPQ) was most likely resulted from the better than expected first quarter financial reports of HP. This rally, however, doesn’t mean the company is out of the woods or that HP has recovered from its slowdown. Is the company on the road to recovery? Will HP further rise in the coming months?

The company’s credit default swap (five years, in USD) has changed course and declined in recent weeks: it has decreased from nearly 371 basis points back in November 2012 to nearly 259 bp as of the beginning of February. This represents a 30% drop from its high point. The current price of 259 means the annual premium is $259 thousand in case of a default of $10 million of debt within the next five years. This premium, however, is still much higher than it was back in 2010.

Hewlett-Packard Company (NYSE:HPQ)One of the reasons for the tumble in the CDS price is the recent recovery of the company’s stock price. Nonetheless, Hewlett-Packard Company (NYSE:HPQ) isn’t out of the woods just yet. The market lowered the company’s chance of default on its debt, but this chance is still relatively high to the company’s chance from back in 2010.

It seems that the market had very low expectations from this company. This could be among the reasons for the spike in the company’s stock in recent weeks. Since the beginning of the year shares of HP sharply rose by almost 39%. So the company didn’t perform as bad as many investors and analysts had anticipated in the first quarter of 2013. But the results still showed a drop in revenues: in the first quarter of 2013 the company’s revenues fell by 5.6% compared to the same quarter in 2012. Moreover, HP’s operating profitability declined from 6.8% in Q1 2012 to 6.2% in Q1 2013. In comparison, a market leader such as Apple Inc. (NASDAQ:AAPL) had a much higher profit margin of 31.6% as of the fourth quarter of 2012 and its revenues grew by 17.7% compared to Q4 2011. But this comparison doesn’t do justice to HP: a better comparison would be to other computer companies that aren’t market leaders such as Dell Inc. (NASDAQ:DELL) or Lenovo (NASDAQOTH: LNVGY). In this comparison, HP’s situation isn’t so dire. Dell‘s revenues declined in the first quarter of 2013 by 10.7% and its operating profitability was 4.9%. Lenovo, on the other hand, augmented its revenues by 11.8% in the fourth quarter of 2012, but its operating profitability is very low at 2.6%. Let’s turn to the future and see if HP will continues to recover.

Hewlett-Packard Company (NYSE:HPQ) is trying to find its market share in the tablet market and has recently introduced the Slate 7 – an android based tablet. This tablet will be marketed for $169, which will put this tablet in strong competition with the mini iPad by Apple that is sold for $329 or Google’s nexus 7, which is priced at $199. This might eventually increase HP’s market share in the tablets markets. Will this highly competitive market revive the company’s growth in sales? Will it raise its profit margins?

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