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Market Update

Challenging Road Ahead for Hewlett-Packard

HP's management team is seeking to rebuild the core businesses, but the turnaround will be slow and painful, says Morningstar's Michael Holt.


 Hewlett-Packard's (HPQ) mixed first-quarter results highlight the many challenges facing the firm as it looks to restore operational excellence to its core business units. Investors can take comfort in the fact that HP finally has a management team that is actively attacking issues and defining an inward-focused strategy to rebuild the business. However, this turnaround will be slow and painful with few opportunities for quick fixes. We view fiscal 2012 as a rebuilding year that establishes the baseline from which HP will be able to drive profitable growth. 

The quarter's results were in line with HP's recent outlook, but startling when viewed in the context of the year-over-year declines in revenue and profitability. Total revenue declined 7% year over year, with approximately half of the decline attributable to lost sales in the PC and server segments from the current hard disk drive shortage. The printing segment saw a 7% decline in revenue from the prior-year period, as supplies and hardware revenue underperformed our expectations. HP's non-GAAP operating margin fell to 8.6%, down 380 basis points year over year, as the firm struggles against external headwinds in PCs and company-specific issues in its services and printing segments.

Michael Holt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.