I often believe that the best opportunities arise when there are large periods of uncertainty. I believe Hewlett-Packard (NYSE:HPQ) is one of those opportunities.
As investors, we often have to ask ourselves, why do companies trade for so cheap? The forward P/E of HP is currently 5.4. So what are the reasons for HP's lackluster performance and will the earnings fall enough to justify its value?
Apple (NASDAQ:AAPL) is probably one of the biggest reasons HP is unable to stay competitive. Apple is a direct competitor with HP. HP used to be one of the largest PC makers until it decided to chase Apple's iPad. HP released the Touchpad. The product was fairly good, but due to its high price and overall lack of interest from consumers, its sales were abysmal. HP then priced the tablets down to $99, which caused a frenzy. Although HP will be taking a loss on the sales, they might be able to grab some market share from Apple. With so many Touchpads out on the market, HP could eventually find a way to monetize them.
HP has been very indecisive. The company planned to spinoff its PC division, but now has changed its mind and may opt to keep it. The division is very profitable. However, the company has intentions to compete in the server space with companies like IBM and Oracle (NYSE:ORCL). I think HP's plan to keep its PC division is a great move. Oracle and IBM are already powerhouses in the server space and it might be tough for HP to grab noticeable market share. IBM and Oracle already provide services for most Fortune 500 companies and have an economies of scale type of model. Regardless, HP's decision to keep its PC business is a good move.
One reason why I did not like HP very much was because of Leo Apotheker. The former CEO of SAP and now HP, is ranked as one of the worst CEOs in history. HP's management used to pride itself on cost-cutting, but that in turn stifled innovation. Not only did we lose a horrible CEO, but we gained Meg Whitman, who is a fantastic innovator. She might give HP the jolt it needs.
The market is expecting that HP's earnings will fall enough that the current forward P/E of 5.4 will be justified. In order for this valuation to be justified, HP's net income would have to decrease by a $1 billion each year for the next five years. I do not think this is possible even with the introduction of tablets. PCs will still be needed and tablets will never fully replace them. I do believe that HP's earnings could fall, but not significantly. I think the current share price offers a great risk-reward play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.