An earlier version of this article had noted 5% revenue growth in the unit of HP software. The correct software revenue growth was 17%. The mad regrets the error.
Year last IBM (NYSE: IBM - News) CEO Sam Palmisano said Hewlett-Packard (NYSE: HPQ - News) too call R & D HP latest gains, has proved he is good. Now is the time of recovery.
The news came in the HP press release. Although non - GAAP EPS of $1.24 beat the consensus of $1.21 estimate, budget guided management 2011 to "at least $5.00.". Previously, HP expected 5.20 m $ to $5.28. According to an email from leakage, the company is cutting back spending, suggesting that its revised forecast would be even worse without belt-tightening.
One in three is bad
Management cited three reasons for the reduced prospects, but few quantification provided.
First of all, the tragedy of the Japan occurred after prior guidance. HP expects Japanese weaker demand, supply chain disruptions and higher. It's just.
Of the Canon Japan (NYSE: CAJ - News) is a major provider of LaserJet. Company printer HP represents 28% of operating income. According to some estimates, LaserJet represent about half of that. HP considers the impact on revenue to 700 million, or about 2% of the quarterly revenue. The impact of cost could be much greater, as HP sweeps to prevent arising from high-margin toner and defections of customers to third party providers. Still, many competitors HP were much less affected by the tragedy in the Japan.
Second, the weakness of consumer demand for PCs is worse than expected. What happened to forecast lowballing, just to be careful? HP is much more exposed to this segment that Dell (Nasdaq: DELL - News), which just announced better than expected earnings and raised guidance. And Apple(Nasdaq: AAPL - News) premium-priced Macs - popular with consumers - are parts of the impressive gains.
Third, HP is stepping up investment in its services business. Hmmm... This is what management EDS said a few years before its acquisition by HP in 2008. It seems HP has done a good job of out cost - then-CEO Mark Hurd was known to do this - and a bad job to invest to adapt to a changing technology landscape. IBM Palmisano was correct.
But wait, there is more
HP deteriorating cash position. Net cash flow excluding debt in its financing activities fell by $ 6.6 billion entering 2010 to 0.4 billion January, as the ratio of debt to shares of HP jumped from 38% to 55%. Operating and free cash flow rose of the year in the fiscal year 2009 and fiscal 2010. While the cash flows from operations improved his total previous year in the last two quarters, HP net cash continued in decline accelerated share repurchases and spent on acquisitions.
Acquisitions and share repurchases are part of the HP EPS growth strategy. But the company plunged into his stash of cash to finance both - a viable strategy. Redemption of the quarter reduced the share of the count of more than 8% year over year and represents more than half of the growth in non - GAAP EPS of 14%. How can HP keep boosting negative with net cash EPS growth?
During the call, an analyst asked about 7% year printer supply revenue growth. TManagement said he expects growth in the long term in the lower - mid-single-digit. This is disappointing, because the printer supplies represent a huge percentage of the profits of HP.
Now?
Disturbances related to the Japan are unfortunate, but they must be temporary, giving more easily comparable HP next year. PC company may or may not recover from the current challenges in the consumer segment, and HP is showing improvement in China after the complete misstep. HP is optimistic about his new TouchPad tablet, due this summer. investors should obtain indications beginning later this year.
Although some services business investment could pay this year - for example, hiring to meet current demand, essentially reward will take place in the intermediate to long term. In addition, the planned investments include hiring an Executive VP for the company. More negative surprises can expect from the investors and HP - once the new EVP gets his arm around the company.
Foolish takeaway
HP has reiterated its budget target, non - GAAP EPS 2014 "at least $7.00" (compounded annual growth of approximately 11%) on its earnings call. But the management does not appear to have a good handle on his business, casting doubts on its ability to reach this target. However, IBM expects similar EPS growth until 2015, with potential for growth. IBM also has superior management, a rich dividend and better quality of earnings.
With a ratio of only 9 times P/E and the expectations of the direction that it can increase non - GAAP EPS to less than 40% here 2014, investors HP could be well rewarded. Still, IBM is a piece of enterprise computing more secure long-term and short-term, Dell appears to reward investors.
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