There's a big difference between “cheap” and “cheap for a good reason”, and it's not always easy to tell the two apart. While Hewlett-Packard (NYSE:HPQ) shares still appear to be undervalued on the expectation of any growth at all, the ongoing execution issues do mean that a return to growth shouldn't be taken for granted. At a minimum, there's still quite a lot of work for management to do make this turnaround a success, and I do have my concerns about the the effect of competition on those plans. On the other hand, today's valuation doesn't exactly presume that those efforts will end in major success.
Fiscal Q3 Comes In On Target
For a company that delivered a couple of beat-and-raise quarters despite some tough end markets, Hewlett-Packard's in-line fiscal third quarter will likely go down as a disappointment, as will management's guidance that growth is not likely in the near term.

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Revenue fell 8% from the year-ago level and 1% from the prior quarter, which was basically on par with Street expectations. HP's segment results were also broadly as expected, with PC revenue down 11% (a little better than expected), printing down 4%, enterprise down 9% (a little worse), services down 9%, and software up 1%. 
On a less positive note, HP's adjusted margins didn't show quite the expected level of progress, though the discrepancies were small (on the order of less than a quarter-point). Gross margin was basically flat with last year and down slightly on a sequential basis, while operating income fell 16% and operating margin fell 80bp (though the sequential drop was just 3% and 20bp, respectively). Enterprise hardware margins were particularly disappointing, while software margins improved nicely.
PCs Lacking Momentum, Printing More Stable
While plenty has been written about how bad the PC market is these days, HP isn't exactly making the best of a bad situation. Not only did Dell (Nasdaq: DELL) outperform HP this quarter (with a 5% decline in “end user computing), but Lenovo (Nasdaq:LNVGY) actually showed year-on-year growth of 2% in its PC business. HP has been unwilling to sacrifice margins in PCs and compete on price, leading to sizable share gains for Lenovo.
Printing is incrementally better. Although the 4% decline in supplies was troubling (as this is a lucrative source of cash flow), HP rivals like Lexmark (Nasdaq:LXK) and Canon (NYSE:CAJ) see the market stabilizing and Canon has made it clear that it has no intentions of trying to compete on price.
Enterprise May Be The Bigger Worry
HP continues to report disappointing enterprise hardware results, a situation which has led to a change in management for the division. Server sales were down 11% this quarter, suggesting that Dell's decision to compete on price paid dividends, though IBM's (NYSE:IBM) x86 server sales were down a similar amount. Storage was also quite weak, with a 10% decline for the quarter.
Here, too, I don't have a lot of confidence in HP's positioning or strategy. I think HP is falling behind in storage and, at the risk of talking my own book, I think Lenovo's plans to grow its server business (management recently laid out the goal of becoming the #3 player in three years) directly threaten Hewlett-Packard's business.
The Bottom Line
Hewlett-Packard really has a lot of work left to do. The margins in the service business need to be substantially better than what they are now, the enterprise business lacks competitiveness, and I don't think HP is following the right strategy in the PC business. So while it's all well and good that the company's cash flow is improving, it can't happen at the cost of long-term competitiveness.
Still, the valuation on HP shares assumes very little in the way of improvement. Zero free cash flow growth can generate a $25.50 fair value, though skeptics may well argue that simply holding firm at zero growth would be an accomplishment in its own right. Given the progress that Lenovo is making and Dell's apparent willingness to sacrifice margin for share, I think the competitive environment is getting more challenging. That said, investors who still believe that HP can grow again could still find something to like in these shares.
Disclosure – At the time of writing, the author owned shares of Lenovo.