Computer-giant Hewlett-Packard () reported second-quarter earnings that were slightly better than expected on Wednesday. The firm earned $0.98 per share versus consensus expectations of $0.91 per share, on a non-GAAP basis. Revenue also came in slightly better than expected, with revenue falling only 3% to $30.7 billion. However, earnings took a backseat to the company’s announcement of a restructuring that will lead to 27,000 job cuts, or what amounts to 8% of the workforce. This will lead to a pre-tax charge of $1.7 billion this year, and it will lead to around $3.5 billion in pre-tax charges through 2014. We think this is a step in the right direction for the company, and, unlike Dell (DELL), we think the company may be rebounding. We think the firm is worth in the mid-$30s.
As HP swelled to become the largest computer company in the world, so did its workforce, and thus its expenses, both necessary and superfluous. We suspect that CEO Meg Whitman has made the cuts in order to improve operational efficiency at what has been a bloated, bureaucratic company. Not only could this improve the company’s earnings in the near-term, but it could also lead to a company that adopts new ideas faster and brings competition to market quickly. As noted by the utter failure of the HP Touchpad, as well as the failed acquisition of Palm, the company has struggled to connect with customers in the mobile arena, which could have been mitigated by some first-mover advantage.
While we don’t think HP is on the path to become as profitable as Apple (AAPL), there were some positives to take from the quarter. Desktop unit sales increased by 5%; this suggests that the company may be taking some share from Dell. In fact, personal computer unit sales were only down by 1% at the aggregate level. Software revenue grew 22%; however, every other segment excluding HP Financial Services experienced revenue declines. Nevertheless, the company still managed to generate $2.5 billion in operating cash-flow in the second quarter, which is fairly robust for a company with a market cap in the low $40 billion range.
Overall, we’re growing pretty constructive on HP’s plans going forward, as well as the company’s dirt cheap valuation. Unfortunately, we think the entire “old” tech cohort appears undervalued, and HP would be among our last choices in the segment. In our view, peers Intel (INTC) and Microsoft (MSFT) look like much more attractive investments with better growth potential and near-term catalysts. Both companies also provide investors with better, safer yields, as we think both are best in class in chips and enterprise software, respectively.