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International Business Machines Corp. (IBM), Cisco Systems, Inc. (CSCO): Can Hewlett-Packard Company (HPQ) Continue Its Recovery?

Hewlett-Packard Company (NYSE:HPQ) has been the best-performing Dow stock over the past nine months, as it has recovered from overblown fears of its demise. In the second half of 2012, the company took two enormous writedowns totaling nearly $17 billion and provided disappointing 2013 guidance. However, since then, Hewlett-Packard Company (NYSE:HPQ) has delivered two consecutive earnings beats. The stock has rebounded accordingly.

HPQ Chart

Hewlett-Packard 1-Year Price Chart. Data by YCharts.

Hewlett-Packard Company (NYSE:HPQ) will report its fiscal Q3 results on Wednesday afternoon. While large tech firms have posted mixed performances recently, I expect HP to deliver another solid quarter, and the company even may be able to raise its full-year forecast. While the PC industry is still struggling, this should be offset by steady improvements in the rest of Hewlett-Packard Company (NYSE:HPQ)’s business — especially printing — and deep cost cuts.

Hewlett-Packard CompanyRebound in printing
HP’s healthiest business unit at this point is the printing business. While HP’s printing revenue has been declining recently, the company has achieved significant margin improvement within the business. New initiatives — such as marketing more profitable inkjet printers to small and medium businesses and lowering ink pricing in emerging markets — have contributed to this improvement. The weak yen has also started to reduce the cost of laser components supplied by Canon Inc. (ADR) (NYSE:CAJ), and this effect probably accelerated in Q3.

These improvements drove a big increase in Hewlett-Packard Company (NYSE:HPQ)’s printing segment profit in the first half of FY13. Printing pre-tax income of $1.91 billion was up more than 20% year-over-year. This momentum bodes well for second-half results.

The rollout of HP’s new multifunction printers — which were first unveiled in late 2012 — could provide an additional boost. HP had not refreshed its multifunction printer portfolio in nearly seven years, so this update could be the impetus for a return to revenue growth in the printing division. HP started to gain share in multifunction printers in Q2, and HP executives expect this trend to strengthen over the course of the year. This could be good news for Q3 printing results.

Stabilization elsewhere
For HP to deliver a third consecutive earnings beat, it will also need to stabilize its enterprise hardware and services businesses. The key to a recovery in hardware is the rollout of Hewlett-Packard Company (NYSE:HPQ)’s new “Moonshot” low-power servers, which hit the market this spring. HP appears to be seeing strong interest in Moonshot servers from a variety of Web service providers. This growth initiative could offset much of the pain from plummeting sales of Itanium servers.

Meanwhile, some industry analysts have detected the first signs of a rebound in demand for HP’s struggling enterprise services business. This could lead to significant margin growth over the next several quarters in combination with HP’s ongoing cost-cutting program.

The services business has been overstaffed recently. This problem was aggravated by the company’s decision to allow some unprofitable services contracts to expire. To fix this discrepancy between revenue and headcount, management has targeted the services business for job cuts.

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