A Bearish Take On HP Under Whitman

Feb.23.12 | About: HP Inc. (HPQ)

Despite earnings so bad they sank the whole market, our Cameron Kaine continues to pound the table for Hewlett Packard (NYSE:HPQ), praising the leadership of CEO Meg Whitman.

Regular readers here may know I have a different opinion on the HP CEO. No doubt she can talk a good game, but here is her strategy, as Kaine describes it:

The company plans to focus heavily and inject capital into its PC division as well as its IT services business which includes boosting research spending and limiting the size of acquisitions.


The plain fact is that the only area where HP's last quarter shone was in its software business, specifically the Autonomy unit, whose 30% growth masked failures elsewhere. Whitman's predecessor, Leo Apotheker, was fired in large part for that big acquisition, and for planning on getting out of the low-margin PC business, which as noted underperformed.

But there's a bigger problem with Whitman's strategy is that it's me-too. It's basically the strategy IBM (NYSE:IBM) launched two decades go. There have been periods in those 20 years where HPQ outperformed IBM, but over the last five years the superiority of IBM's strategy has been proven, as it doubled in value while HPQ's value fell by one-third.

Is there an alternative? Apotheker's plan was to de-emphasize commodity hardware and emphasize unique software, systems like Autonomy that can provide value from within the cloud and differentiate HP's offerings from its competitors. It's almost indisputable that there is more growth in that than in what Whitman is doing, which is riding the PC business into the ground and compete with the IBM buzzsaw in the more profitable services segment.

Despite all that IBM has done for shareholders over the last several years its PE is still an Apple-like 15, because its earnings have been growing quickly. HP's multiple is an almost Ford-like 9.7, and the prospects for growing those earnings grow dimmer by the day.

Whitman's rise illustrates the real rot at the heart of HP, though. She's a politician, who took over the company through a political coup. That's not what HP needs. What it needs is an entrepreneur who understands the cloud and can craft a strategy that capitalizes on it.

Until it finds an entrepreneur, I say sell.

Disclosure: I am long IBM.