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Will Increased R&D Spending Breathe New Life Into Hewlett-Packard?

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HP's relatively new CEO Meg Whitman has been a key player in HP's turnaround, and says that she will be turning the company's focus toward innovation.

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Hewlett-Packard Company (NYSE:HPQ) will report its third-quarter earnings on Wednesday, May 22. Analysts have recently become more optimistic about the company's potential earnings, raising their expectations by $.04 per share and increasing their estimates for FY13 by approximately four times that number. HP has been up 50% in 2013 and an impressive 80% over the last six months. This makes HPQ the best performing stock among its peers by far.

The bulls have taken over HPQ's market today; so far, roughly 15,000 calls have been traded, compared to 8,800 puts. The biggest player today was a weekly May 23.50 call, where roughly 8,100 contracts were traded. It seems like investors are expecting a quick post-earnings jump, so that they are able to make profits on the play.

Because of the poor performance of the PC market, HP has looked to move away from PCs and is currently seeking to offer a wider array of products. HP can prove to be even more successful in the market if it shows investors that this turnaround is moving faster than expected. Although some analysts on Wall Street are skeptical about HP's earnings, HP has historically exceeded estimates in past quarters.
HP's relatively new CEO Meg Whitman has been a key player in HP's turnaround and has been just what HP needed in this fragile PC market.

"Whitman has come in like a breath of fresh air… morale is up," said Rob Enderle, principal analyst at the Enderle Group. Although she started off laying low, Whitman says that she will now be turning HP's focus toward innovation: "I increased R&D spending and basically focused the R&D efforts and said we've got to get these products that were close to market to market fast."

HPQ closed Monday at $12.18 and has a 52-week low of $11.35 and a 52-week high of $24.05.

My Trade: Buy the June HP 21 calls for $1.12
Risk: $112 per 1 lot
Reward: Theoretically unlimited
Breakeven: $22.12
Greeks of This Trade:
Delta: Long
Gamma: Long
Theta: Short
Vega: Long
No positions in stocks mentioned.
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