Seeking Alpha
Recommended for you:
-
dasdasdasdadas
Long/short equity, deep value, special situations
Profile| Send Message|
( followers)  

It seems every day that Hewlett-Packard (NYSE:HPQ) is in the news for something. Whether it's related to the accounting scandals at subsidiary Autonomy, the Dell buyout, or the death of the PC industry in favor of the faster growing mobile market. Many smart money managers have taken opposing views on the outlook for HP's core business. Let's take a look at the company and see if it's a worthwhile investment for our portfolios.

Background

If Texas Instruments (NASDAQ:TXN) and Intel (NASDAQ:INTC) are the grandfathers of today's tech industry, HP is the great-grandfather. The company was founded in 1939 by Bill Hewlett and David Packard in their one-car garage in Palo Alto. The company is well-known for its PC business since the 2001 merger with Compaq and its famed printing products. The company has an established services business, with the 2008 buyout of Electronic Data Services (EDS). That division is now called HP Enterprise Services. In 2009, the company purchased 3Com, and later in 2010, HP purchased Palm Inc. as it sought to become a one-stop shop for corporate computing services.

Company Mishaps

Most of the problems at HP derive from a series of missteps taken by the company's board and management over a period of many years. Many CEOs have come and gone and overall corporate strategy kept changing.

The first big blunder from management was choosing to pass on the original design of the Apple I computer by Steve Wozniak. He was an HP employee, and HP had the first right of refusal to his work. The company had decided that it wanted to stay in the scientific, business and industrial markets in the 1970s.

Second, right before the dotcom crash in 2000, the company appointed Carly Fiorina to be the first female CEO of a Dow Jones Industrial Average company. She was unable to properly execute the merger of HP and Compaq. HP incurred heavy losses, layoffs, and the stock lost half its market value. The board fired her in 2005.

Third, in 2006, the company was hit with a scandal when HP's general counsel and Chairwoman Patricia Dunn hired private investigators to investigate board members and several journalists over an information leak. The investigators impersonated board members and journalists in order to obtain their phone records.

Fourth, in August of 2010, then CEO Mark Hurd resigned over expense account irregularities relating to a possible affair with an HP contractor. Many leading tech executives came to the support of Mark Hurd, because they felt that he was the proper CEO for the company. They felt that his strategy was the one the company needed and he was "righting" the ship. Mark Hurd found work rather quickly when Oracle (NYSE:ORCL) hired him to be their President.

Fifth, after Mark Hurd resigned, the company hired the former head of SAP Leo Apothekar as HP's new President and CEO. It is during Apothekar's tenure that the company bought Autonomy and later took an $8.8 billion write-down after learning that Autonomy had misrepresented its finances prior to the buyout.

Current situation

In 2011, HP hired former eBay (NASDAQ:EBAY) CEO Meg Whitman to fix the damage done by her predecessors. She has laid off 27,000 employees and is faced with a declining PC business due to the enormous popularity of smartphones, tablets and other mobile devices. If the company can be turned around at all, Meg Whitman might be one of the best for the job (read more about giving HP a second chance). However, even her expectations are that it will take at least 5 years, and that's an eternity in the corporate world. Since Whitman left eBay in 2008, the stock has soared over 250%. What's more is that there still appears to be deep inherent value in the stock (check out eBay's SOTP).

HP looks set to return to profitability this year after taking last year's write-downs. The company has $12.59 billion in cash and debt of $28.23 billion. The company has enough cash to service the debt and fund the dividend of 53 cents a share for a yield of 2.50%. The stock is currently trading at $21.40, a significant improvement from the 52-week low of $11.35 reached in November after the Autonomy write-down. The 52-week high for the stock is $25.40.

Considering that the company has almost doubled in value from its 52-week low, I recommend investors that were long the stock to exit and consider the short side. The company's shares have also rallied on the back of the Dell buyout (see why HP is left out in the cold). Investors are hoping that the buyout means there's signs of life in the PC industry. HP has significant competition not only from Dell, but also from fast growing Chinese manufacturer Lenovo.

The company has completely missed the mobile market, and as it transitions to more services, the company faces stiff competition from the likes of IBM (NYSE:IBM), Oracle and SAP (NYSE:SAP). And the Autonomy situation is not good. The founder and CFO of Autonomy have both retained high-profile criminal defense lawyers. That is never a good sign. I think there's more to come from the Autonomy saga, and I think that will negatively impact the stock.

While insiders and hedge funds have been snatching up Whitman's former company, eBay (see which insiders and hedge funds love eBay), many notable investors have started falling out of love with her current company, HP. For investors still long the stock, it is worth noting that hedge fund manager Seth Klarman from Baupost Group, and author of Margin of Safety, exited his HP position last quarter. That means he saw value in the stock below $12, but is a seller at current levels.

Famed short-seller Jim Chanos is still short the stock. He sees the entire PC space as a dreaded "value trap" for investors. This is where stocks appear to be values based on their financials, but are heading downward because of a declining business model. Billionaires Paul Tudor James and Ken Fisher were lowering their stakes last quarter, selling off 64% and 33%, respectively (see how hedge funds are trading HP). I tend to agree with these assessments and suggest you do the same.

Source: The Short Side Of Hewlett-Packard