In a recent article, I asked investors to avoid Hewlett-Packard (HPQ) and suggested that its future remained too cloudy. On Thursday investors received a glimpse into its future or at the very least know what its past now includes.
Now a part of its past is Leo Apotheker, the once embattled CEO who sought to transition HP from what it does best in an effort to enter new markets; those that include prominent tech giants such as Apple (AAPL), Google (GOOG) and Cisco (CSCO).
HP has been a mainstay in my portfolio for quite some time and a company that I continue to follow very closely. I just have not been able to quite grasp its problems. Clearly the obvious ones have been the fierce competition it faced in the markets it entered, but aside from that it has always been a tech powerhouse on many levels. It is clearly #1 in printing with only Lexmark (LXK) being included in the discussions in terms of the enterprise. It is widely understood that HP’s recent declines have been the result of underperformance.
Previously I asked two questions regarding HP’s future:
- Has the bottom been reached?
- What are management’s plans to fix its problems?
On Thursday (at the very least) one of the questions was answered. It arrived with the name of Meg Whitman who now assumes the role as Chief Executive. The irony of it all is that just prior to Leo Apotheker’s departure, he was quoted as saying, “The company needs to sharpen its focus.” This realization arrived after only his first nine months on the job, during which time he “examined each of the company’s businesses in depth” and “carefully considered the path forward.” Mr. Apotheker (at the time) did not realize he had proclaimed the vacancy for his job.
By “sharpening its focus”, HP announced that it was not only discontinuing its tablet strategy, but also considering selling off its PC business citing that Apple, Google and Research In Motion (RIMM) had disrupted the PC market. Mr. Apotheker simply said, “The tablet effect is real.” This was the first real poignant remark that suggests perhaps he was not the right man for the job. There was a clear underestimated market that failed to accurately assess not only HP’s own tablet strategy, but also that of its competition.
Apple’s iPads and Google’s Android platform are now the dominant standards in that arena and it will likely stay that way for the foreseeable future. A couple of weeks ago we learned how quickly the competitive landscape can change on Wall Street. Google’s acquisition of Motorola Mobility (MMI) told investors how fierce some rivalries can get when a dominant company such as Apple obtains a certain status.
Can Meg Whitman turn things around?
This is the million dollar question. The company is taking a new strategic direction, one that I think makes perfect sense. But investors must not make the mistake and expect an immediate turnaround; this is going to take some time to realize. I think investors would be wise to give HP the benefit of the doubt here -- particularly after seeing how Cisco’s (CSCO) restructuring was able to transform that company.
As bleak as things may sound, HP is not performing all that badly. The irony of it all is that since its acquisition of Compaq a decade ago, the strength of the company has been its PC business; and one of the segments that it is considering to discontinue. In the recent quarter, commercial Client revenue, grew 9%, led by another strong quarter in workstations, which generated 19% revenue growth. Total Consumer Client revenue was down 17% versus the year-ago quarter as both desktop and notebook were down 4% year-over-year as both segments continue to be equally affected by the weakness in the consumer demand.
HP also showed pretty decent levels of profitability during the quarter. Gross margin climbed 100 basis points, and while the company lost some of that momentum through the operating items, operating income still grew 3.8% and the company reported a small increase in margin. Not surprisingly, software, services as well as printing were margin leaders.
It is tough to recommend HP even as it continues to reach new 52 week lows. I think investors would be wise to wait this out a bit longer until its future appears clearer. While Meg Whitman is indeed a good hire, it is going to take her some time to steer this ship back on course. At $22 per share, there is still some room to play the short position here although it is hard to consider. I compare HP’s struggles with that of Cisco who saw its stock drop to $13 as it sought to restructure. Keep an eye on HP as any glimmer of hope can result in a bounce, “dead cat” or otherwise.