I believe the most sensible thing I have read about Hewlett-Packard (HPQ) comes from JPMorgan which recently upgraded the stock from Underweight to Neutral, raising its price target from $15.00 to $21.00. That is a significant jump for a neutral weighting. Why not recommend buying the stock if one expects it to move up more than 25%? These are JP Morgan's thoughts on the future of the company:
"With HP, our view is that the headline news just cannot get much worse. A positive turnaround in the model is likely to be measured in years, though, and we continue to think that HP faces an uncertain growth profile. We also believe that HP eventually needs to divest one or more business segments in order to set the stage for sustainable revenue and earnings growth. All of these factors underpin why we are moving only to Neutral. A break-up of the current business model, particularly the divestiture of PCs or printing, could make us become more constructive on the stock."
From JPMorgan's standpoint, HPQ stock is skimming the bottom like a catfish that cruises a lake bottom to feed. It can't get much worse! The one thing I agree with is that no matter how one looks at Hewlett Packard as an investment, it is a long, long term investment and may take some time to define its future. How it will grow and what it will look like as the future unfolds is not something I cannot speculate on.
JPMorgan also made reference to divesting of one or more business segments in order to "sustain revenue" and earnings growth. Lately, HPQ has had inquiries about the purchase of two of its divisions: Autonomy and Electronic Data. Even though the company has not signaled a direct interest in selling things, it did mention in its annual report at the end of last year: "We also continue to evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives." It just so happens that these two divisions have struggled with poor performance. I can see how the stock could increase in value if these "ideas" gain steam because it will be a good beginning to the road of profitability.
Hewlett-Packard's board is actively studying a break up of the company as one option to help the tech company obtain value for its shareholders. This "active studying" does not mean it is something the company will do. There has been no committee formed to do a real study. Shareholders have voiced discontent with the value for the company at present because they believe it worth much more than the price reflects. There is no direct pressure to break up the company but it is a viable idea. As the economy slowly recovers and the stock trades higher, it may turn into an ancient discussion and nothing more. If the company can recover with the economy it is not likely to be brought up again.
The thinking behind an HPQ break up would be that the pieces are worth more than the whole. The rational has merit. Other companies like Kraft (KRFT), McGraw-Hill (MHP), and Tyco (TYC) have spun off divisions that were keeping the company down. Analysts have estimated that if HPQ's units were separated, the total value of the divisions could be worth more than $20 a share and as much as $29 a share, as against the current $16.50 share price range.
So Hewlett-Packard is primarily interested in developing its "enterprise operations" instead of entertaining downsizing. What does this mean? It wants to focus on the concept of production, delivery, and service. Does this mean becoming more efficient-yes but that may not be the end of HPQ's journey. I am redundant when I write a shrinking PC market accounted for 28% of the company's fourth quarter sales. Computers with the new Microsoft (MSFT) Windows 8 system have not lived up to the levels hoped for either.
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Technically Speaking
The stock has been moving up since mid November and it looks like a stepping pattern as the low points are just below the middle Bollinger band, touching the 40 day MA. I am waiting to observe to see if the stock will move back down to the 40 day MA. The bounce off the resistance level coincided with over bought positions in the RSI indicator so the stock is moving down. The MACD MA's have already defined a high point and are now moving down. The key to where it is going will depend on what happens if it touches the 40 day MA.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
