Tech Stocks: Can Meg Whitman Deliver the Next Great Turnaround?

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Meg Whitman is aiming to be Hewlett-Packard's Lou Gerstner.

Gerstner was the CEO of International Business Machine (NYSE: IBM) from 1993 until his retirement in 2002, and is widely credited for IBM's turnaround.

How did he save IBM from going out of business and reverse its fortunes?

Well, among other things Gerstner made the difficult decision to lay off more than 100,000 employees shortly after his arrival.

And now Meg Whitman, CEO of Hewlett-Packard (NYSE: HPQ), has taken a page from IBM's playbook.

On Wednesday, Hewlett-Packard announced it would lay off 27,000 employees, or roughly 8% of its worldwide workforce, over the next two years.

HP hopes the layoffs will save the company $3 billion to $3.5 billion and it plans to reinvest those savings in research and development, innovation, and the overall quality and design of products.

In a prepared statement Wednesday Whitman said, "While some of these actions are difficult because they involve the loss of jobs, they are necessary to improve execution and to fund the long term health of the company."

So far Wall Street likes her plan. Hewlett-Packard (NYSE:HPQ) stock was up 10% in after-hours trading Wednesday following the announcement and was up over 5% Thursday morning.

"While we certainly don't believe HP has resolved all their issues, we do see the company moving in the right direction," RBC Capital Markets analyst Amit Daryanani wrote in a note to clients.

HP (NYSE: HPQ) Stock Eager for a Rebound

HPQ stock is down almost 40% over the past twelve months. The $50-plus share price it traded for just two years ago seems very far away.

Meg Whitman, however, hopes that a slimmer HP can fuel the turnaround, as well as revamping its PC and printer business and pushing towards the more lucrative cloud computing services.
She hopes the investment in research and development and product design will spur growth down the road.

"As a world-class innovator, we should have excellent quality products," she said. "I think we have very good products, but I also think they can be better."

Meanwhile, Whitman said on a conference call with investors Wednesday that she remains "cautiously optimistic" about the future of the company. HP is trying to battle back from an awful 2011, in which ex-CEO Leo Apotheker wanted to abandon the company's PC business.
Whitman has made it clear that she does not agree with this thinking and that she can make the tough decisions that need to be made in order for HP to regain prominence in the tech world.

Whitman said the company is seeing "early signs" of a turnaround.

"While I wouldn't say we're turning the corner, we are making real progress," she said.

Hewlett-Packard also announced Wednesday its earnings for the fiscal second quarter ended April 30.

The results were mixed as profits fell 31% from the same period a year ago and overall sales fell 3%. However the earnings per share of 80 cents and the $30.7 billion in sales beat analysts' expectations.

The company said it expects to earn between 94 cents and 97 cents per share this quarter, excluding one-time charges, coming in well below analysts' median estimate of $1.02 per share.

HPQ: Time will Tell

It remains to be seen if HP will join the likes of IBM and Apple (Nasdaq: AAPL) in the realm of great tech turnarounds. For now those two companies remain the exception and not the norm when it comes to tech world comebacks.

In a sign that Whitman might be making progress Hewlett-Packard raised its outlook for the rest of the year.

It expects to earn between $4.05 and $4.10 per share for the full year, up from its previous guidance of $4.00 per share and higher than analysts' forecasts of $4.02.

Until those results are realized, caution remains the word on The Street.

"Although we like the direction the company is headed under [H-P CEO] Meg Whitman, and value investors are likely to warm up to the stock in the near term, we are taking a wait-and-see approach on the stock given the enormity of this turnaround in a weakening macro environment," Brian White of Topeka Capital Markets told MarketWatch.

HP (NYSE: HPQ) stock closed up 3.3% Thursday at $21.77.

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