The world's largest PC and printer manufacturer. Silicon Valley icon and caretaker of decades of garage technology culture, inspiring innovation over the world.
- 10% revenue fall in 2013
- No growth until 2015
- 3-year stock performance: -63.19% (S&P 500: 49.62%)
- 3 CEOs in 3 years
So what happened? Has HP (NYSE:HPQ) lost its way and its soul? Certainly the case could be made that HP is suffering from a multiple personality disorder. As the old saying goes, you cannot make others happy until you make yourself happy first, and HP certainly is not making investors happy, as it needs to define what it is and what it wants to be.
Attempts over the past decade at defining itself, while often starting full of optimism, eventually fell flat, as HP, instead of innovating and finding its own way, tried to take pages out of other playbooks, instead of being itself.
Let's look at HP's three personalities and then use the wisdom of Dr. Deming's Deadly Diseases of Western Management to try and diagnose what went wrong.
Personality #1 -"Value Cannibal" (2000-2009)
Symptom: Trying too hard to be Dell
CEOs: Carly Fiorina and Mark Hurd
HP opened up the decade by making a smart move in acquiring Compaq, expanding its hardware footprint, which complemented its strengths as a PC and printer manufacturing leader. From there the company followed the Dell (NASDAQ:DELL) and Wal-Mart (NYSE:WMT) model, ruthlessly focusing on cost cutting.
Lowering costs may be okay as long as quality stays the same. However, just good enough can turn into not good enough pretty fast once so much of the company has been gutted so that soul and innovation - which drive future growth, have all but disappeared, and employee morale sinks to a point where they no longer feel empowered or excited to create the next big thing.
Any technology company that cuts R&D is no longer considered a technology company, as it has become just another commodity manufacturer of electronics.
Dell found out that there were limits to only focusing on cost-cutting, supply chains, and operations, without building value and growth through research and development, and is now focused on its end game as a publicly traded company.
Personality #2 - "Too Fast Too Furious" (2010-2011)
Symptom: Trying too hard to be IBM
CEO: Léo Apotheker
Due to scandal, HP decided to remove Mark Hurd, and brought in former (NYSE:SAP) CEO Apotheker to lead the company. Apotheker, coming from a software background, decided to focus on higher margin software and services, and laid out his vision.
In August 2011, HP announced it would divest itself of tablets, mobile, and also its long standing market leadership position in PCs. This was not unheard of, as even IBM, the founder of the PC itself, had divested its own PC business years earlier, in order to focus on software in services, and HP had been mulling the decision for years, but shelving it as earnings improved.
HP also announced the $10.3 billion acquisition of Autonomy, and the market rebelled, punishing HP with a 25% drop in the month alone.
Apotheker was eventually removed, and board member Meg Whitman was installed, in a firefighter role to calm things down.
Personality #3 - "Post Traumatic Autonomy Disorder" (2012 - present)
Symptom: Shell-shock, scapegoating
CEO: Meg Whitman
In defense of Apotheker, you can't go out and hire a software guy and then get mad at him when he starts focusing on…software. Sure, the market hated Apotheker's execution, but shouldn't the board have extensively vetted Apotheker before hiring him? If you were the HP board, would you have not agreed to a common vision and laid out your 3-5 year plan with him before bringing him to run one of the largest companies in the world?
Sorry, scapegoating Apotheker only goes so far, and after the CEO roulette, you have to wonder if the problem really is the captain of the ship or the ship itself.
Next the blame game continued with the Autonomy disaster. Autonomy was charged with cooking the books and overstating growth. Again, before dropping $10 billion in change, should there be an extensive vetting process on the acquisition target to make sure everything checks out?
Again, where is the vetting process? Is there even one in place? Who exactly owns the soul of this company to make sure these shenanigans don't take place? Did the MBS ratings auditors all start working for HP when the housing bubble imploded on itself or what?
Now Meg is stuck trying to clean up the mess and figure out where HP is supposed to go next. All options seem to be on the table, and HP is doing some soul searching, even rumors are surfacing of splitting the company.
Before HP goes out on a soul searching mission of what strategic decisions it needs to make, it needs to take note of structural and cultural problems and correct them before going forward. I do not know if Meg stepped in to right the ship before handing it off to the next growth CEO. Or if she was installed to not only firefight, but drive the company forward as well. In either case, the CEO roulette might just continue unless some very glaring issues are addressed.
Dr. W. Edwards Deming to the Rescue
Source: IBS Software
Dr. Deming was considered one of the biggest influencers and teachers of the Japanese quality and productivity miracle after the Second World War, and is a national hero in Japan, credited along with General MacArthur for helping to rebuild the country into an economic powerhouse, and awarded for his work by the Emperor of Japan.
His management methods of continuous improvement "Kaizen" are revered and held as a gold standard in management and engineering circles around the globe.
To understand structural problems at HP fully, we can view them through the lens of Dr. Deming's Deadly Diseases of Western Management.
Dr. Deming described 7 deadly diseases total, and HP clearly violated 4 of them.
1. Lack of constancy of purpose
What is the vision of HP? I can look on IBM's (NYSE:IBM) investor page and get a very cohesive vision laid out for the next 5 years, with very clear direction for where the company has been, and where it is going. As an investor, I look at this page with full confidence and do not feel uncertain about IBM.
Contrast this with HP's page, where it seems to just be a bunch of links and PDF's.
This may sound very simple and common sense, but HP has failed to do the following over the past few years:
- Tell us what you are going to do
- Do it
- Then tell us what you did
The whole PC business (the heart and soul of the whole company) was mulled over, then it was decided to get rid of it, then that was decision was cancelled. How can an investor run any type of due diligence when a company is unsure about its core competency? If the company is not sure about itself, how does it expect an investor to have any confidence?
As an investor, we have no idea what HP is planning. Perhaps it is fine with the status quo, and needs more time for soul searching to figure out exactly where it wants to go.
Now what are you gonna do? - Al Pacino, Any Given Sunday
If HP wants to be the world's premier PC maker, then be the best PC maker on the face of the planet. Show Apple (NASDAQ:AAPL) what time it is. Build a quality, unbreakable product the people fawn over, not just buy because it's inexpensive. Go all in or go home, but just go one way or the other.
Investors hate uncertainty and HP has been punished because of this.
2. Emphasis on short-term profits
Focus on short-term profits, without lack of a long-term growth plan, only takes a company so far before it runs out of steam. Again the example of Dell comes to mind. This is especially hurtful for a technology company, which by definition needs to come to market with new products or services to drive growth. So far HP just seems to be content as a commodity manufacturer of electronics.
3. Mobility of management
This also goes with point #1. With so many CEOs in such a short period of time, HP keeps starting over from scratch, and lacks any cohesive vision. All of these restarts have destroyed momentum and shareholder value, a misstep like Autonomy, for example, just erased billions alone. Most companies or even nations do not have the luxury of these $10 billion "do-overs." It takes a new CEO a year or two just to get embedded into a company before their vision begins to bear fruit.
4. Running a company on visible figures alone
Coupled with point #2, this is very instructive, considering Dr. Deming himself was a statistician by education. However, he recognized the limitations of statistics used in a vacuum, and their misuse. Note at 10:26, how he talks, in 1984, about the dangers of creative accounting, running a company simply to please shareholders, and how things such as the multiplying effect of unhappy customers, cannot be tracked by statistics.
Everything that can be counted does not count, everything that counts cannot be counted-look for hidden information - Dr. Deming
Even with modern systems such as Salesforce.com (NYSE:CRM), this type of tracking is still not possible. This is where HP began to lose its edge, by simply focusing on key statistics, instead of investing into R&D and its employees, who would be able to drive the next legs of growth forward.
Even Oracle (NYSE:ORCL), with its ruthless, best-in-business focus and discipline on shareholder statistics, continues to drive the message to investors that it is moving forward and innovating. Those messages cannot be quantified, but they are necessary to grow and they cannot be communicated through a general ledger, balance sheet, or cash flows statement.
Cures and Ideas for Growth
1. Fix the management structure, not the people
HP can keep playing CEO roulette all day, but that is clearly not working. What is the vision? What does HP want to be? Just another commodity electronics manufacturer? Or a true technology company? Do some soul searching, and figure out what HP is and where it wants to go.
Lay out a clear plan to your shareholders so they know what it is you want to do. Don't just wing it. Vet your decisions and go with them.
HP's problems simply are not strategic and tactical decision-making problems by the CEOs. In fact, bad decisions are a side-effect of the bigger problem, which is company management culture, vision, and philosophy.
2. Realign with Microsoft
HP acquired PalmOS, and attempted to reinvent the wheel by creating its own tablet, then decided to discard the strategy altogether. Microsoft (NASDAQ:MSFT) went its own way, and created the Surface, when HP could have simply aligned with them the whole time, letting Microsoft focus on the software, and letting HP focus on the hardware. This would have worked well with each company's core competencies.
Microsoft, sponsoring the private buyout of Dell, seems to have lined back up with Dell. HP was in a much stronger position to create a tablet contender, which would have wiped Android (NASDAQ:GOOG) tablets out and created serious competition against the Apple iPad.
3. 3-D printing
HP is the world leader in printers and PC's, and is not even looking at 3-D printing because…?
As this CNN.com article shows, 3-D printing is going mainstream. President Obama even mentioned it.
This does not mean HP has to do another $10 billion acquisition to get in the game. Get the sales reps out in the field. Sponsor hack-a-thons. Build relationships with the garage-tech innovators on the ground. Get tech street cred back by being on the edge of new and cutting-edge innovation.
How excited would some small time innovator get if they knew HP was talking to them? I guarantee they would go absolutely ballistic, and call up all their closest friends and relatives that night. Get the creative juices flowing and start building the creative energy that leads to the next big thing.
A very small investment gets the relationships going, without risking a huge amount of capital, so if the business does take off, HP can buyout the winners and scale them up when critical mass is big enough to make the business profitable. This is one play to borrow from IBM when they sponsored Linux back in the 1990s.
4. Defend the data center
No other company on the face of the planet was in a better position to create the glue that holds the entire data center together than HP. Apotheker noted this as HP's strength and laid out a complementary software vision that would have gone down this path. HP has a rich history of data center governance tools, like the original HP Openview; however, this vision seems to have lost tremendous momentum, and HP is not capitalizing on a core competency here.
5. Bring back R&D
You cannot call yourself a "technology" company when you are cutting R&D, period. Technology companies help define the curve itself. Lack of R&D just makes HP another commodity electronics manufacturing company.
6. Reinvest in your employees
Technologists want to do cool stuff. They want to come to work and work towards the future. Simply dumping cost measures on them does not inspire them at all. Save efficiency for the finance and operations teams, that is what they do. Let the technologists come up with cool stuff and help them grow your business. Incentive them for their creativeness. One spark could grow into billions.
HP scores very poorly on the fundamentals. This is a battered stock with negative earnings and reduced earnings growth potential going forward.
The bright spots with HP, that hold the company together, are that it does still take in a huge revenue stream, has a sizable cash moat, and a modest debt load.
The company also has a decent dividend; however, without the backup of increasing earnings, I personally would not count on any dividend growth rate, and would consider it a poor decision by management to increase a dividend in the face of decreasing earnings.
Cash: $11.3 billion
5-year dividend Growth: 9.34
Payout Ratio: N/A
P/E - ttm : -2.63
5-Year PEG: N/A
Percentage over Graham Number: N/A
O-Metrix Score: N/A
Stock Scouter Rating: 6/10
- Market leader in PCs and Printers
- Strong brand recognition
- Cash stockpile
- Diversified in both enterprise and consumer lines
- Management has not provided a clear growth vision
- Earnings contraction through 2013 fiscal year
- Weak R&D support
- Tablet strategy with Microsoft
- Data center and cloud unification leadership initiatives
- 3-D printing
- Assert itself as the owner of the PC and printing space
- Another poor acquisition
- Bold move may panic shareholders
- More management turnover destroys confidence
- Indecision or reversal of direction destroys shareholder confidence
Data: MSN. Charts: Stock Market Functions Add-in for Excel
HP ironically taught me an important lesson, and that is: statistics do not always tell the whole story. Determining management strength is a key to selecting any successful company, and something that cannot be quantified in statistics alone.
I hold shares, however, prudent money management kept me from accumulating them in any significant amount. I will not be accumulating additional shares due to lack of earnings growth and total uncertainty regarding the direction of the company going forward.
Ray Dalio has also reduced his stake in HP by 10%.
The technology world needs a strong HP and I wish the company success, however, as an investor there are much better value choices available, such as industry stalwarts Microsoft or Intel (NASDAQ:INTC).