HPQ Q2 – The Meg diet

Austerity buys time for a proper strategy to be formed.

• HPQ posted good Q2 results and guided nicely as the cost cutting plan began to show results.
• Q2 Revenues and EPS where $27.6bn / $0.87 compared to consensus at $28.0bn / $0.81.
• Revenues from the PC segment where the real culprit for the top line falling 20% YoY to $7.58bn.
• This was in part exacerbated by aggressive actions on the part of Dell to hang onto market share with inferior products.
• HPQ declined to participate in a price war and so share was lost.
• Dell caused problems this quarter but in reality the real danger is coming from Samsung, Asustek and Lenovo.
• These vendors have a proper strategy in place and are much better positioned to thrive in the new market that the PC industry has become.
• It is here that HPQ must focus its attention as Dell does not represent much of a threat to HPQ in the longer term.  
• The real story was cost cutting where 29,000 positions are being eliminated to eradicate the inefficiency that has been endemic to this company for many years.
• Consequently operating cash flow also grew by 42% YoY and due to a substantial reduction in capex, free cash flow grew 100% YoY.
• Guidance was positive with Q3 EPS $0.84-$0.87 compared to consensus of $0.83
• This combined with relief that the damage from the PC market and Dell’s predations were not worse, drove the shares up 14% in after-hours trading.
• These results have all the hallmarks of a company teetering on the edge of long term decline.
• To HPQ’s credit, it is showing good progress on fixing the company to face the very difficult environment it faces.
• However, it is doing this by cutting investments and this raises concerns about a recovery to revenue growth in the longer term.
• I suspect that HPQ cutting investments because it has not yet really decided what it wants to invest in for the long term.
• HPQ is currently sitting at a strategic cross-roads and needs to decide what it wants to become and how it will show growth once again.
• Meg is buying HPQ time through a stringent diet but there is still no clear picture as to what HPQ wants to become and how it intends to show sustainable growth.
• The stock remains inexpensive and there is enough cash for a the formation and execution of a properly considered strategy but shareholders will not wait forever.