Hewlett-Packard May Not Be on Sound Footing

70% of Business Under Strain

Personal systems group: contributes about 29% of sales. Operating margin: 5%. Revenue declined 19% on unit shipments declining by 4%. The trend is towards netbooks with cloud computing. Every manufacturer worth mention has netbooks lined up. Most of them compare well with HP. Sony (SNE) P Series beats HP hands down on asthetics. My guess is that revenue / unit will keep decreasing while pricing will be very competitive and margins will be under severe profits going forward. None of HP's notebooks or desktops stand out vis a vis the competition. In these recessionary times, discretionary spending will be deferred.

Outlook : Quite tough

Printer division: the crown jewel of HP: 21% approximately of revenue but 18.5% margin. Revenues down 19%.Unit sales of printers down 33%. No surprises there. Soon they will have to give away printers free to entice users to keep buying the ink (I suspect the fattest margins are there). Everyone I know is giving a serious thought to getting non HP printer refills and printing fewer pages. Maybe I am paranoid but Brother and Canon (CAJ) offer cheaper and equally good printers. Very competitive area.

HP better come up with a differentiating technology fast if it wants to retain its margins. Good part though is that they are expecting some R&D driven ink technology based barriers.

Outlook : Dim

Storage and Servers: 14% of revenues, 10% + operating margins. Revenues down 7%. I figure they would be lucky to maintain their server sales in a corporate slowdown era. Huge amounts of second hand servers would be flooding the market soon at rock bottom prices.

Outlook : Dim

Services : One bright area with IBM (IBM) being the only other major competitor. EDS (EDS) acquisition should help. 30% of revenue and nearly 13% margin. Pressure on wages should ease retaining margins. But why would I not buy IBM or Infosys (INFY) if I wanted a services play.

Outlook : stable

Software: Revenue decline here also. 3.5% of revenue and nearly 16% margin. I do not know why margin jumped from 5% to 15% on declining revenues. Business technology optimization sales showed a decline too.

Financial services: 2.2% of sales, 6.4% operating margin which showed a decline. They will have to use aggressive financing to push sales resulting in continued pressure on margins.

Outlook : tough

Somewhere I read that post adjustment for goodwill, HP book value takes a big hit and there are reports of insider sells over past month (please check). With no immediate possibility of improved sales outlook, services is the only stable play in HP, while EDS is being assimilated in the company. I think cost savings post acquisition is the only margin driver but that too has to be one off.

I think HP will have to make an acquisition soon enough to plug the glaring hole in its portfolio ie. near absence of a mobile phone platform (Ii am dismissing Ipaq division as it is a poor also ran). If they buy Motorola (MOT), one can only wish them luck.

Overall, all segments of the business face deep pocketed competitors. Services (30% of revenue) offers the only stable part of business, though margins face strong competition and are being cannibalized by almost all other divisions. If the slowdown persists, one might see significant earnings downgrades. Needless to say when earnings go down P/E goes higher, so that too is not a draw here. Stage may be set for a difficult stock performance.

Disclosure: Author has a short position in HPQ.

Comments

[ron_paulite:]

" None of HP's notebooks or desktops stand out vis a vis the competition. "

Obviously u haven't been following the notebook market, HP Mini 2140 is selling like hot cakes in the US and overseas. Maybe even better than Acer - which pioneered the mini notebook.
Dell and Lenovo don't have a good Mini yet.

Mar 01 11:26 PM

[Atim Kabra:]

You might be right Ron. However, i have physically seen most of the note books and compared specs just last month. I strongly recommend you check out Sony, Lenovo, Acer, Dell etc for updated information. In net books, pl try and see some details on Sony P series (mini). I wished to highlight that there is no strong compelling reason which HP offers in its products vis a vis the competition. This is a market where margins will be under pressure and average realization per unit will be falling.
atim




On Mar 01 11:26 PM ron_paulite wrote:

> " None of HP's notebooks or desktops stand out vis a vis the competition.
> "
>
> Obviously u haven't been following the notebook market, HP Mini 2140
> is selling like hot cakes in the US and overseas. Maybe even better
> than Acer - which pioneered the mini notebook.
> Dell and Lenovo don't have a good Mini yet.

Mar 02 01:22 AM

[Sick of Sho...:]

Nothing like writing an article that supports your own position in an attempt to drive prices down a little more. There should be a simple rule: if you hold <i>any</i> position on a stock you don't write a critique.

Mar 02 07:49 AM

[Atim Kabra:]

you are right. will not write again on short positions. it is ethically in a maybe zone with disclosures but still takes the attention away from the main point. thanks for pointing out.


On Mar 02 07:49 AM Sick of Shorties wrote:

> Nothing like writing an article that supports your own position in
> an attempt to drive prices down a little more. There should be a
> simple rule: if you hold <i>any</i> position on a stock you don't
> write a critique.

Mar 02 09:00 AM

[Kirk Lindstrom:]

I don't see anything wrong with a short writing about why he is short. I find it more valuable than some writer with an "analyst" title at a brokerage creating sales literature to help a brokerage churn accounts to generate commissions.

Disclosure. I'm long HPQ with shares from working there long ago, still well in the green.

Mar 02 09:42 AM

[SivBum:]

According to CC transcript, EDS+HPS lost ground as well...not so rosy as you painted:

seekingalpha.com/artic...

Mar 02 11:17 AM

[Prop Tradin...:]

Everyone should talk their book, its called putting your money where your mouth is.

Mar 02 11:29 AM

[numinary:]

Kirk,

I totally agree with your statement "I don't see anything wrong with a short writing about why he is short. I find it more valuable than some writer with an "analyst" title at a brokerage creating sales literature to help a brokerage churn accounts to generate commissions."

However, I think it would be useful from an editorial point of view to have the disclosure at the beginning of the article/blog. This is a simple style change that would allow readers to be more informed as they wade through the myriad articles available on stocks.

--numinary

Mar 02 12:21 PM

[Murali Thoota:]

I am long on HPQ, and believe it will outperform other tech stocks.

The author should comment on the relative strenght of this stock vis-a-vis the competition, or the broader sector.

Mar 03 03:29 PM

[Jeff Noel A...:]

In my wishlist, HP 2140, or Asus EEe PC 1000HE.. With Ubuntu from canonical. dell will be the main player here as they had started to manufacture their Mini 9, 12's with Ubuntu as OS, Vista is an option

Let the Open Source wars begin (at least for Ubuntu, MSFT)

oh, and about this article, Mr. Kabra's speaking his brains. let him be. do not fully agree, but Hp IS ON SOUND FOOTING

Mar 05 10:32 AM