Will H-P be the Turnaround Story of 2013?

With shares of Hewlett-Packard (NYSE:HPQ) trading at around $13.68, is Hewlett-Packard an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Hewlett-Packard has had a disastrous few years. We have seen sluggish PC sales, flat revenue, declining profits, increased debt, and exposure in Europe (not a positive at the moment.) That’s not all. Those are only the negatives you could see from a company facing normal challenges. In the case of Hewlett-Packard, the situation goes well beyond normal. Obviously, acquisitions haven’t panned out, which is an understatement. Palm and Compaq were flops, but Autonomy brings it to another level. Who was responsible for accounting fraud? Does it matter? It led to an $8 billion writedown. This story is far from over, and it can end up having a major impact on Hewlett-Packard one way or another. It will be interesting to see how it all plays out. Get your popcorn ready.
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On the positive side – yes, there is actually a positive side – it has been rumored that Carl Icahn might take a stake in the company. You never know with Mr. Icahn, but don’t get too excited. These rumors started on Twitter, which is a great site, but it shouldn’t be used as a go-to source for information about billionaire investors and their next moves. A real positive is that IT and cloud computing are showing good margins. Perhaps Hewlett-Packard should move more in that direction. Another potential positive is CEO Meg Whitman, who had enormous success at eBay (NASDAQ:EBAY).
That’s a lot of drama. It’s not often that numbers relax people, but this could be one of those few situations. Let’s take a look at some important numbers. 
E = Equity to Debt Ratio Is Weak
The debt-to-equity ratio for Hewlett-Packard isn’t terrible, but there is plenty of room for improvement. The same can be said for the balance sheet. Dell (NASDAQ:DELL) is stronger in both areas.  

	Debt-To-Equity	Cash	Long-Term Debt
HPQ	1.25	$11.30 Billion	$21.79 Billion
DELL	.86	$11.27 Billion	$9.03 Billion

T = Technicals on the Stock Chart Are Weak
Hewlett-Packard has been performing well of late, but the last three years has been atrocious.

	1 Month	Year-To-Date	1 Year	3 Year
HPQ	21.25%	-42.75%	-42.97%	-71.26%
DELL	15.12%	-28.13%	-28.79%	-25.48%
S&P 500	1.71%	16.28%	15.60%	36.03%

At $14.34, Hewlett-Packard is currently trading above its 50-day SMA, but below its 100-day and 200-day SMA.  

50-Day SMA	13.78
100-Day SMA	15.79
200-Day SMA	19.01

E = Earnings Have Been Weak
Annual revenue and earnings have been decreasing.

	2008	2009	2010	2011	2012
Revenue ($)in billions	118.36	114.55	126.03	127.24	120.36
Diluted EPS ($)	3.25	3.14	3.69	3.32	-6.41

When we look at last quarter on a YoY basis, we see the same story.

	9/2011	12/2011	3/2012	6/2012	9/2012
Revenue ($)in billions	32.12	30.04	30.69	29.67	29.96
Diluted EPS ($)	.17	.73	.80	-4.49	-3.49

T = Trends Do Not Support the Industry
You can make the argument that PCs will always be around because you can do a lot more on a PC than you can on a mobile device. This is definitely true, and the fact that PCs will be around for a long time is comforting to many people. However, there isn’t going to be much growth in the space. The good news is that Hewlett-Packard is invested in many other areas, and the company is actually performing well in some of those areas, as mentioned earlier.
Conclusion
Will Meg Whitman turn this company around? Nobody knows. This is a different kind of challenge than eBay. On the other hand, winners usually find a way to win, and she’s a proven winner. Hewlett-Packard will increase spending on research and development. Therefore, the company isn’t going to sit on its hands. A big problem for Hewlett-Packard right now is its identity. It seems to be at a crossroads. This could present an excellent buying opportunity, especially since expectations are low. For example, the average target price is 13.53, which is below where the stock is currently trading.
While there is good potential here, especially long-term, it’s too risky of a play at the moment. At the present time, Hewlett-Packard is a WAIT AND SEE.
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