Will HP Provide Guidance Above Expectations Next Week?
Shares of struggling technology giant Hewlett-Packard have recovered somewhat from their poor 2012 performance in the past three months, but have still lost roughly 40% of their value in the past twelve months.
HP has disappointed analysts and investors repeatedly in recent years. The company desperately needs to show the investment community that performance has bottomed out and that HP can soon return to EPS growth (however modest that may be at first). A good first step for HP would be providing guidance above analyst estimates when it reports earnings next week. Fortunately, the recent slide in the yen's value against the dollar could help HP achieve that goal.
Yen devaluation could provide a boost
The recent governmental change in Japan has led to looser fiscal and monetary policy. As a result, the yen-dollar exchange rate has moved by 20% since the beginning of October, from around 78 yen per dollar to 93 yen per dollar. HP's printing division (responsible for about 30% of the company's profit recently) relies heavily on components built in Japan, primarily by Canon . At several points in the past two years, HP's management has blamed the strong yen for declines in HP's printing segment operating margin. The recent weakening of the yen could increase the printing segment's operating margin by 300 basis points, based on historical margins.
Ultimately, improvement on that scale could boost HP's annual profit by $0.30 a share. Theoretically, HP's recent reorganization and cost-cutting moves could allow even greater margin expansion. Most notably, CEO Meg Whitman decided to combine the PC and printer divisions last year. The reorganization is expected to generate savings through supply chain coordination, along with some headcount reductions. According to Whitman, HP already began to see cost benefits in the quarter that ended last October. These cost reductions should be even more significant in fiscal year 2013.
While the weakened yen is providing HP an unexpected margin benefit, in the near term HP could be hit with offsetting losses from its yen currency hedges. Investors should pay close attention to any information HP provides next week on the scale of cost improvements in the printing business versus offsetting hedging losses.
PC weakness still a headwind
On the other side of the ledger, HP will continue to see headwinds from the weak PC market. Microsoft's Windows 8 has seen weak demand since its launch in late October. While the new release boosted Windows sales by 24% in Q4, that initial jump was much smaller than the increases seen with previous Windows releases. Many PC makers have been introducing Chromebooks based on Google's free cloud-based Chrome OS to offset weakness in traditional Windows PCs. Hewlett-Packard recently joined this trend, releasing the HP Pavilion Chromebook.
While HP's entry into the Chromebook market could help HP maintain its PC market share, Chromebooks are low cost-devices and will not do much for the bottom line. HP's Chromebook has a starting price of $329.99, well below the average selling price of the company's Windows PCs. On the other hand, HP does not have much to lose. The PC division produced just $1.7 billion in earnings before taxes last year, less than 14% of the company total. Moreover, the PC business has very low fixed costs, so HP can generally maintain its operating margin even when revenue declines. As a result, even a 15% annual revenue decline in PCs this year would have a relatively modest $0.10 impact on HP's 2013 fiscal year EPS.
Expectations are low
Expectations for HP's other businesses are modest enough that downside should be fairly limited. For example, while the services business is expected to generate an operating margin in the high single digits over the long term, for 2013 HP expects operating margin of just 0%-3%, with revenue down 11%-13% due to expiring contracts that will not be renewed. Furthermore, HP expects revenue decreases in the Business Critical Systems line of Itanium-based servers, which will be a drag on profit in HP's enterprise group.
Tune in next week
To summarize, the upside from better printing margins should have a bigger impact on HP's FY13 results than downside in PCs. Assuming HP's other businesses perform up to HP's very modest internal expectations, the company should be able to report full-year EPS at the top of or above its $3.40-$3.60 guidance range.
Since we are only one quarter into HP's 2013 fiscal year, the company will probably be conservative in terms of updating its full-year guidance. Nevertheless, there is a good chance that HP will raise the bottom of its guidance range to $3.50 or so. Even that small gesture could have a positive effect on HP shares, insofar as analysts currently expect full year earnings below the guidance range at $3.32. With HP trading at just five times expected 2013 earnings, the company should see significant multiple expansion if it can convince investors that EPS is stabilizing. Improved guidance would be a big help there.
The massive wave of mobile computing has done much to unseat the major players in the PC market, including venerable technology names like Hewlett-Packard. However, HP's rapidly shifting its strategy under the new leadership of CEO Meg Whitman. But does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor blip on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.
The article Will HP Provide Guidance Above Expectations Next Week? originally appeared on Fool.com.Fool contributor Adam Levine-Weinberg owns shares of Hewlett-Packard. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.