Despite Layoffs, Signs of Stability Emerge from H-P
Our confidence in the firm's turnaround effort continues to build as management implements a systematic and methodical approach to dealing with the issues HP has struggled with recently.
HP (HPQ) reported second-quarter results that suggest signs of stability for the wounded technology giant. Our confidence in the firm's multiyear turnaround effort continues to build as the new management team implements a systematic and methodical approach to the issues HP has struggled with recently. HP also took this opportunity to announce the next step in the turnaround: a new restructuring effort that will trim its work force by 27,000 jobs. Finally, management also reaffirmed the full-year target for non-GAAP EPS of more than $4 per share, a critical step in rebuilding investor confidence. Our $40 fair value estimate is unchanged.
A substantial reduction in HP's work force is the most newsworthy item from the quarter, but we view this as a necessary, and not unexpected, step in the turnaround story. HP will trim its work force by approximately 27,000 employees, or 8% of its work force. The total cost of this restructuring is expected to approach $3.5 billion, including a $1.7 billion charge that will have an impact on HP's fiscal year 2012 results. Cash outflows in fiscal 2012 related to this effort are expected to total approximately $400 million. HP expects approximately one third of the employees to exit the firm in fiscal 2012, with the remaining 18,000 to exit by the end of fiscal 2014. HP expects to generate annualized savings of $3.0 billion-$3.5 billion by the end of fiscal 2014. The majority of the savings will be reinvested back into the business.
Michael Holt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.