Hewlett-Packard (HPQ) Posts a 44% Decline in Profit

Troubled tech titan Hewlett-Packard (HPQ: Charts, News) posted disappointing first quarter earnings on Thursday, missing already lowered Wall Street expectations. The company posted earnings of 73 cents per share, or $1.47 billion, on revenue of $30 billion. This was a 44% decline in earnings on a 7% drop in revenue from the prior year quarter.

Analysts on average expected earnings of 87 cents per share on revenue of $30.7 billion. Adjusting for one-time charges, HP earned 92 cents, beating the consensus, but still fell far short of the $1.17 per share it earned a year earlier. However, adjusting for foreign exchange rates, its revenue decline was even worse, at 8%, which was the worst revenue drop HP posted since the 2009 financial crisis.

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The world's largest PC maker blamed its shortfall on weak consumer demand, supply shortages due to the Thailand floods and internal problems. New CEO Meg Whitman also stated that underinvestment in systems and procedures exacerbated HP's woes. Whitman acknowledged the need for HP to reduce overhead costs to free up cash for investments in higher growth business segments - such as security services, information management and cloud-based computing.

HP currently earns most of its revenue from computers and printers, which comprise the bulk of its consumer products and services segment. This segment posted a global revenue decline of 23% from the prior year. HP's PC business has been steadily eroded by the rise of Apple's (AAPL: Charts, News) iPads and Macs, especially in richer developed nations. HP also failed to gain market share in emerging markets, where cheaper PCs are still more popular than Apple's premium products. The floods in Thailand, which disrupted the production of hard drives, caused more than half of HP's revenue drop. Meanwhile, its printing division posted a 7% drop along with declining margins.

The company attempted to divert some of it resources to its higher-margin information technology segment, which is the company's second largest division, but the shift was clumsy and was bogged down by "ongoing operational problems". Its information technology services segment improved slightly, posting a 1% revenue gain over the prior year quarter.

Cautious spending by business customers caused a 4% decline in its commercial businesses segment. While HP remains cautious regarding Europe's outlook, it stated that other markets, such as Asia and North America, are stabilizing.

HP shares have declined 37% since the dismissal of CEO Mark Hurd in August 2010. His replacement, SAG's Leo Apotheker, caused the company to bleed out over $30 billion in market capitalization in a mere ten months at the helm, before being replaced by eBay's Meg Whitman. In August 2011, Apotheker killed off HP's fledgling TouchPad tablet, the last device to use Palm's webOS, in response to the iPad's rising popularity. He also discontinued all of the company's webOS smartphones. Apotheker also spooked investors by attempting to shed HP's entire PC business, in an effort to divert all resources towards its more profitable IT segment.

Whitman pleaded for investors to be patient, and that HP was in the midst of a multi-year turnaround. Whitman stated that HP will first focus on stabilizing its finances and improving its operations before making more drastic changes. She also stated that HP needs to respond to orders at a faster rate than its industry peers. Looking forward to the next quarter, HP expects earnings between 88 to 91 cents per share, missing the analysts' average expectation of 95 cents per share.

Shares of HP trade at 6.1 times forward earnings with a 5-year PEG ratio of 1.5. The stock, which pays a 1.6% dividend, may bounce back strongly on improvements in the Wintel market and any advancements in the IT services field. IBM (IBM: Charts, News) bounced back strongly at the turn of the century with a similar shift towards higher margin products and services, which transformed the lagging income stock into an explosive growth stock.

Other News About HPQ
Hewlett-Packard stock falls after Whitman talks of long turnaround effort
Whitman doesn't offer investors any easy answers.
Hewlett-Packard's Q1 Profit Tumbles 44% HP posts a steep decline in profit and revenue. Other Stocks in the News
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Published on Feb 24, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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