Tickers in this Article: HPQ, AAPL, ORCL, IBM, DELL, EMC, LXK, CAJ
It stands to reason that a change in executive leadership, particularly when that new CEO is brought in from outside the firm, is going to lead to significant changes in how a company operates. After all, why would a new CEO want to risk losing the honey pot that is a Fortune 500 pay package, as a consequence of the prior CEO's mistakes? To that end, then, Hewlett-Packard (NYSE: HPQ) shareholders should be in for a stretch where the company reports some kitchen sink quarters, tries to clean up past mistakes and forge a new path to better performance. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Sluggish End to the Year
HP didn't report a very strong quarter to close its fiscal year, but there is no particular reason that anyone should have thought it would. Revenue declined 3% from last year, but did rise 3% from the third quarter, missing consensus by a small amount. Software was the only operating area of notable growth, as HP posted a 6% improvement in organic sales. Services wasn't great, up 2%, but that was better than servers/networking/storage, PCs and printing, which were all down from last year.

Profits were quite unimpressive. Gross margin dropped nearly four points from last year and over two points on a sequential basis, in GAAP terms. Operating expenses were more or less in check, but those declines in gross profit were too much to bear. Operating profits fell 46% from last year and 29% from the third quarter, on a slightly adjusted GAAP basis, adding back acquisition and impairment charges. (To know more about income statement, read: Understanding The Income Statement.)

Keeping the PC Business ... Why?
Prior to this earnings release, HP announced that it would be reversing its decision to dispose of its PC business; it's worth wondering why. Although Apple (Nasdaq: AAPL) has a profitable niche PC business, Dell (Nasdaq: DELL) and HP have largely been displaced by foreign PC makers and it's hard to see how this will be a growth business in the future. I'm not suggesting that Hewlett-Packard should have just binned the business outright, but management will need to run this operation as a cash cow and minimize expensive reinvestments.

Troubling Trends in Printing
Prior to this quarter, I might have suggested that the one thing HP does fairly well is printing. Now even that seems to be up in the air. Of all the reporting segments, this was the weakest on the top line, as revenue fell 10% and the company saw a 5% year-on-year decline in printer units. It's not as though Lexmark International (NYSE: LXK) or Canon (NYSE: CAJ) are blowing the doors off, so HP probably is not seeing dangerous share erosion, but it is nevertheless unnerving to see a lucrative repeat business taper off, when the company could use that excess cash flow.

How Much Hope in Enterprise?
Apart from software, HP just doesn't seem to have too many areas of strength. The server market continues to erode, due in some part to competitive gains from Dell and International Business Machine (IBM) (NYSE: IBM), but also the withdrawal of Oracle's (Nasdaq: ORCL) support. At the same time, networking and storage are not growing enough to really offset the damage. While other rivals like Dell and NetApp (Nasdaq: NTAP) seem to be in similar straits, it looks like HP has a long, long way to go, to be any sort of threat to the likes of EMC (NYSE: EMC).

What's the Plan? Stay Tuned
New CEO Meg Whitman has not exactly dazzled the Street yet with her turnaround plans for the company. To be fair, she's still fairly new to the job and does not have a lot of directly relevant hardware market experience. To her credit, she seems to be more keen to focus on improving the businesses that HP already has, as opposed to burying its problems in more acquisitions. (To know more about acquisition, read: Analyzing An Acquisition Announcement. )

The real question is how far outside the box she's willing to think and whether HP can really out-design and out-engineer its rivals. To that end, why can't HP be relevant in PCs again? People are still buying them and as Apple shows, people will buy a platform that offers something different, even if the difference is more cosmetic and psychological than based in engineering. Likewise, the x86 server market may be in decline and printing may be stagnant, but why couldn't the company figure out appealing, share-seizing products?

The Bottom Line
It's almost hard to quantify how unimpressive, if not pathetic, HP's performance has to be for the stock to not be a bargain at these prices. If it grows at all, and doesn't see margins abjectly collapse, the stock is too cheap. However, we have seen once-successful tech companies basically collapse; Atari, Gateway and Netscape come to mind, as well as others like Xerox (NYSE: XRX) and AOL (NYSE: AOL) that are trying to find a new path back to former glories.

It is hard to argue forcefully for taking a chance on HP, when investors can choose already-successful names like IBM or EMC, instead. Still, turnarounds can be surprisingly lucrative and it may be fair to suggest that there's more risk in IBM or EMC stumbling, than in HP getting much worse. That's not the most rousing of endorsements, but turnaround stories are often best when the circumstances look worst.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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