Near-term Challenges Linger for HP - Analyst Blog

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HP Australia Pty. Ltd., the Australian arm of Hewlett Packard Company ( HPQ ), recently announced a seven-year infrastructure and applications services agreement with a 172-year-old rural services and automotive company, Elders Australia Ltd.

Through this deal, Elder expects to deploy cloud technology to launch its enterprise technology refresh program, known as Project Connect, in a cost effective manner. By deploying enterprise cloud technology, Elders seeks to secure processing capacity and real-time data access, which will help the company to rapidly adapt to the changing agri-business environment.

This deal will likely help Elder to drive innovation by getting new products and services to market faster, thus eliminating lengthy capital acquisition periods and system deployment processes. Moreover, according to Elder Australia, HP's cloud will provide robust infrastructural facilities and a service delivery model that will enable the company to enhance each of its program releases. The applications methodologies and tools provided by HP will help de-risk the legacy development components of the company.

Hewlett-Packard is increasing its international footprint to further grow revenues. Moreover, the company is also diversifying its manufacturing facilities across geographies. Consistent with this strategy, the company has opened an advanced manufacturing facility in China to enhance its ability to serve the fast-growing Chinese market and cash in on the rapidly developing West China market.

The company is well positioned to benefit from the fast-growing small and medium business ( SMB ) segment. It is also rationalizing its core portfolio by strengthening the core businesses and relocating some production to low-cost regions (such as the shift of its mono-laser business to Shanghai). Moreover, the company is currently intent on expanding its base in emerging economies.

Winning infrastructure deals may help the company to sustain its revenue stream, but the company still faces several challenges within its Personal Systems Group, including the threat of tablets and market share cannibalization by Asian competitors.

Although tablets can serve as an alternative to PCs for most everyday functions, we do not expect them to replace PCs any time in the near future. As tablets take market share from the PC business, Hewlett-Packard should do more to expand this business in our view. Especially because the company's products are still quite popular with consumers and the brand is one of the best.

Adopting an accretive strategy for countering competition from Asian as well as Western competitors remains a challenge for the company. The company's biggest Asian rival Lenovo has gained significant share over the past two years and surpassed Dell Inc. ( DELL ) to become the world's second largest PC company with 13.5% market share in the third quarter of 2011. So in a way Lenovo offers the most significant challenge for the company.

Hewlett-Packard has achieved a leadership position in China, which is a key growth market for the company. Going forward, improving business volumes without sacrificing margins will be the real challenge here.

As expected, Hewlett-Packard reported modest fourth quarter results, with revenue declining on a year-over-year basis. However, earnings in the quarter surpassed our expectation. Moreover, the company's margins declined due to exchange rate fluctuations and continued margin pressure in the services division.

This apart, the shortage of HDDs in the coming months, resulting from the recent flood in Thailand may hamper production. This is expected to negatively impact units, revenue and margins going forward, despite a rise in PC prices.

Although HP's CEO Meg Whitman is a sound leader, we believe that she has a tough job on her hands, especially as the company's business growth remains challenged owing to worsening external environment, including weak demand from Europe. We believe that she has to formulate effective strategies to improve the overall turnover of the company and also improve margins.

The company has a short-term Zacks #3 Rank (Hold rating).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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