Hewlett-Packard Co. (HPQ) yesterday announced earnings results for the second quarter of its fiscal ‘14 (2QFY14; ended April 30, 2014). CEO Meg Whitman clarified that it was a mistake that the company released results during market hours. Earnings were in line with analysts’ expectations but revenues missed estimates. Hewlett-Packard’s stock ended the day lower by over 2.2%.
As expected, the company reported earnings per share of $0.88. Revenues came in at $27.3 billion, a decline of 1% year-over-year (YoY) and 3% sequentially. They were $110 million lower than analysts’ expectations. The company’s gross margin expanded half a percent point to 24.2%, which – aided by the $831 million the company spent on share buybacks during the quarter – resulted in earnings per share (EPS) growth of 1.1% YoY.
The Silicon Valley veteran has been struggling as demand for its legacy products has slowly deteriorated in the face of cloud computing and smart devices. The latest results continue to illustrate the company’s misfortunes, as Whitman focuses on cost cutting. She announced additional job cuts of 11,000-16,000 on top of the 34,000 already planned.
HP reports results through three main segments that are then further divided. Most of the company’s business is generated through hardware sales to businesses, along with enterprise solutions services. Personal computers and sales to retail consumers are the company’s second-largest business, followed by printing solutions.
The company’s largest segment, the Technology Solutions Group, generated nearly half of HP’s total revenues, with sales exceeding $13 billion in the quarter. After a brief pickup over 4QFY13, sales have continued to decline, with the latest drop being 3.1%, from $13.76 billion at the same time last year.
Within the Technology Solutions Group are four sub-segments; Services is the largest of these, with 2QFY14 sales of $5.7 billion. Technology Services led the segment’s decline with a revenue drop of over 6.2% YoY. The Services sub-segment recorded a 5% drop in sales. Enterprise Servers, Storage and Networking also declined by half a percent, due to lower demand for Business Critical Systems and Storage products.
Personal Systems Group is the second-largest revenue stream for the company, with 2QFY14 sales of $8.17 billion. The segment manufactures notebooks, desktops, workstations, and other products for retail consumers.
Personal Systems Group was the only segment that registered growth for the company, with a 7.8% YoY increase in revenues. On a sequential basis, revenues declined by 4.2%. Other devices fueled the segment’s growth, with a 27.3% YoY increase in revenues to $308 million, followed by Desktops and Notebooks businesses, which recorded increases of 7.7% and 7% YoY, respectively.
The Desktops business – the second-largest component, with 41% of the segment’s revenues – is the only hardware product with consistently increasing sales over the last five quarters, even in a declining PC market. HP’s growth in this segment has been attributed to strong commercial demand for both desktops and notebooks out of Europe and Japan.
The Imaging and Printing Group is the smallest of HP’s three main segments with revenues of $5.8 billion for 2QFY14. The segment manufactures commercial and consumer hardware, namely cameras and printers, along with supplies such as toners and cartridges.
The Imaging and Printing Group’s revenues declined 4.1% YoY, and were essentially flat sequentially. The segment’s revenue decline was led by Supplies, whose sales dropped more than 6% YoY to $3.87 billion.
HP stock has been the best performer compared to its larger peers on a year-to-date basis. The stock has appreciated 13.6%, with Apple Inc. (AAPL) following at 8.2%. The S&P 500 Index (SPX) – a measure of the broader market – is up 2.4% over the same period.
HP’s shares are currently trading at a 2014 forward price-to-earnings (P/E) multiple of 8.6x, a 53% discount to the S&P 500. The stock is also trading at a discount to its top five competitors, with the exception of Unisys Corporation (UIS).
Analysts are projecting full-year earnings of $3.70 a share; the company’s guidance is in the range of $3.63-3.75 a share. Of the 37 analysts that cover the stock, 15 have rated it a Buy while 20 have a neutral outlook on the company.
We believe that the company is a Buy, given that its forward 12-month multiple is trading at a significant discount to the industry and its peers. The company is also trading at a discount to the S&P 500.
HP is continuing with its cost-cutting measures, as it is essential that it operates efficiently in a mature and saturated market. The Personal Systems Group’s growth is encouraging and a bright spot for a company that does most of its business in its fourth fiscal quarter. If the legacy tech giant was trading at the same multiple as that of the rest of the industry, we believe the price target of HPQ will be in the mid-40’s in the 12 months ahead.
Do you agree that HP is a Buy at current valuations? Let us know in the comments section below, and our analyst will get back to you shortly.
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