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Hewlett-Packard Company (HPQ): This Stock Rose 67% in the First Quarter

Hewlett-Packard Company (NYSE:HPQ) stock rose 67% in the first quarter 2013, making it the best-performing stock among the 86 large cap technology stocks tradingon major U.S. exchanges.

Why the big jump? Hewlett-Packard Company (NYSE:HPQ) posted better than expected earnings in its fiscal Q1 2013, ending Jan. 31. Better here means “less bad,” given the behemoth’s turnaround status. The quarterly jump places the stock’s share price 3% above where it stood a year ago before it bottomed out last fall.

Current biz snapshot

Here’s the current business mix and operating margins (non-GAAP) by segment.

Chart by BA McKenna based on company’s F. Q1 2013 data. *Overall GAAP operating margin is 6.2% & non-GAAP is 7.9%.

The two problem children are the personal systems (notebooks, PCs, workstations) and enterprise services (IT consulting) segments. They’re both large and barely eking out an operating margin — and we’re taking non-GAAP. These segments — which together account for 40% of total revenue — are a big drag on the company’s performance.

As to the services business, International Business Machines Corp. (NYSE:IBM) and Accenture Plc (NYSE:ACN) are two main competitors. IBM’s competing segments had 19.2% (tech services) and 17.2% (business services) margins in 2012.  Accenture Plc (NYSE:ACN)‘s operating margin was 14.1%; notably, Accenture’s 61% ROE (with no debt leveraging that number up) indicates it’s been incredibly efficient at generating earnings.

The printing and enterprise group (hardware for businesses) segments are keeping the company afloat. Software has a nice margin, but since it only accounts for 3% of revenue, it’s not adding much to the bottom-line. Whitman is wise to focus on growing this segment. Software is a cash cow for IBM, which successfully transitioned from a largely hardware business to one heavily focused on software and services in the mid-90s. In 2012, IBM’s software segment, which accounted for more than 23% of its revenue, sported a 37.6% operating margin.

Where forth from here?

CEO Meg Whitman is undeniably extremely talented and also known as a tough competitor. However, I just don’t think that’s going to be enough to turn this huge ship around. That said, I know what I don’t know — and I (and most others) don’t know the business connections and politics that take place behind the scene. The X factor could be a plus or minus.

I wrote in March 2012, “I’m not sure if anyone could reverse the damage done under previous CEOs.” That’s still my opinion, especially if Hewlett-Packard Company (NYSE:HPQ) stays in the PC and other low-margin businesses.

A few of Hewlett-Packard Company (NYSE:HPQ)’s major business issues:

1. Low margin PC business an anchor on performance

The PC market is contracting both in size and margins. So, it seems the best Hewlett-Packard Company (NYSE:HPQ) can hope for is to stem further deterioration in margins, rather than improve them. Given the size of the segment (29% of revenue), the other segments are going to have to churn out some out-sized margins to make up for this anchor.

A wise move seems like it would be to either spin off its consumer business (or portions of it, including PCs) or divest it, as IBM did when it sold its PC division to Lenova in 2004.

However, there’s a complicating factor and one IBM did not face in its decision — the printer segment. HP’s printer business, while no longer the powerhouse it once was, is still a nice money maker. Surely, printer sales are often paired with PC sales. So HP’s printer business would likely be hurt (the question is to what degree) if Hewlett-Packard Company (NYSE:HPQ) exited the PC business.

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