Don't Get Too Excited About Hewlett-Packard's Quarter

When does a drop in year-over-year revenues across nearly every business segment warrant a 7% jump in a company's share price? Apparently, when a company beats analysts' estimates. That's what's happening with Hewlett-Packard shares today after announcing fiscal Q4 and fiscal 2013 earnings.

Don't buy the hype. Analysts and their estimates have long driven short-term share price pops. Conversely, "missing" an estimate, even if a company's results are solid, often puts near-term pressure on share price. Look no further than Groupon's recent quarter and its initial share price drop after a solid performance because it fell short of expectations.

A dose of reality
As a Foolish investor, it's likely you look at the mid- to long-term prospects of a company and use them as a basis for making investment decisions. In HP's case, forget how it's performing compared to expectations and take a look at reality.

Unfortunately for HP fans, the reality isn't good right now. By most accounts, Hewlett-Packard CEO Meg Whitman is a capable leader, but turning around HP was always going to be a daunting task, and based on its recently completed 2013 fiscal Q4, little to no progress was made.

HP operates across six business lines. Of the six, its enterprise group enjoyed a 2% increase in revenue compared to fiscal Q4 of 2012. That's the good news. The not-so-good news is that the enterprise group was the only segment to show any improvement, and even that didn't compare favorably on an annual basis. In the fiscal year ended Oct. 31, 2012, HP's enterprise group generated $29.8 billion. This fiscal year? $28.2 billion.

Non-GAAP results, those that remove one-time items and extraordinary charges, are often a better indicator of a company's results, as large writedowns or acquisition-related costs can dramatically alter earnings. That's especially true with HP -- it took a charge of $8.8 billion in 2012's fiscal Q4 in its software segment due to its Autonomy acquisition fiasco.

With that said, HP's non-GAAP earnings were off 13% from last year's fourth quarter, operating margins decreased to 9% from 2012's 10.4% on a non-GAAP basis, and cash flow from operations declined to $2.8 billion compared to $4.1 billion. The list goes on and on, but you get the idea. Despite statements from Whitman, including, "Turnarounds are nonlinear, and this happens to have been a very strong quarter for us," no, it wasn't a good quarter, by any measure.

Consensus estimates for HP non-GAAP net earnings in fiscal Q4 were for $1.00 a share on revenue of $27.9 billion. Hewlett-Packard delivered $1.01 a share on $29.1 billion in revenue. That's good, right? Yes, but only compared to analysts' meager expectations. Like five of its six lines of business, both non-GAAP earnings per share and quarterly revenue were down this quarter, 13% and 3%, respectively.

Analysts point to HP's improved balance sheet -- cash and equivalents are up to $12.2 billion from last year's $11.3 billion -- and upcoming tablets running Google's Android OS as positive signs moving forward. But weighed against nearly across-the-board declines, a decent cash position and more forays into mobile devices are little to hang an investor's hat on.

Final Foolish thoughts
It's undeniable that Whitman has a monumental job righting the HP ship. Like many in the IT industry, Hewlett-Packard was late to adapt to rapidly changing technologies, and to Whitman's credit, she freely admits it.

But here's the thing: Whitman has been at the helm for over two years now, and other than an unwarranted jump in share price this calendar year, what's there to show for it? Cutting overhead and implementing a drastic change in business focus takes time, but shouldn't there at least be some signs it's working? Apart from beating lowered analyst expectations, that is.

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Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. 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.

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