The continuing soap opera surrounding Hewlett-Packard (HPQ) has to stop at some point. Hopefully the new CEO, Meg Whitman, can break the cycle. The company seems to continue to make missteps in its operation and execution. In the most recent Q1 2012 conference call, the company indicated it is having issues related to supply constraints associated with hard disk drives due to flooding in Thailand. The company indicated half of the company's recent poor quarterly performance was due to issues with hard disk drive supply.
The company indicated it is more significantly impacted by the hard disk drive situation than its competitors, as it chose to focus on profitability rather than market share. The company also noted that it will likely have issues related to hard disk drive supply in the coming quarter as well, although not as drastic. It's possible the hard disk drive issue is a smoke screen for deeper problems within the company, which may surface later when the hard disk drive supply issue is resolved and can't be used as a scapegoat.
Meg Whitman noted that previous under-investment in the company is now a part of the company's problem with poor revenue. Ms. Whitman also highlighted execution issues with respect to systems, processes and people need to be addressed going forward, as well as planning for and taking advantage of industry shifts.
Currency issues with respect to the weakness of the dollar versus the yen was mentioned as problematic due to the company's supply of Laserjet printers being denominated in yen. Maybe the thought of hedging the company's exposure to yen appreciation via futures contracts will pop in management's minds at some point.
Pretty much every business unit of the company was down or flat except software, which grew 30% and was due in large part to Autonomy-- a recent acquisition. Autonomy provides products for management of information.
In the conference call, the company indicated it is seeing signs of economic improvement in the U.S., but not so much in the rest of the world.
HP's stock has been in an upward trajectory since September of 2011, but took a hit in recent days following the company's earnings release as shown below:
The company's stock price appears to have put in a bottom, so this could be a good entry point for the company. However, until the hard disk drive issues are in the rear-view mirror and HP shows real signs of recovery, any investment in the company should probably be protected in some manner. A protected covered call, also known as a collar, will be considered for HP. A covered call may be entered by selling a call option against the stock which can then be protected via purchase of a put option.
Using PowerOptions, a protected covered call was found with a potential return of 2.5% (41.5% annualized) and a maximum potential loss of 8.9%, even if the price of the stock goes to zero. The potential return and the maximum potential loss take advantage of an upcoming $0.12 dividend payment. The specific call option to sell is the 2012 Mar 27 at $0.60 and the put option to purchase is the 2012 Mar 24 at $0.07. A profit/loss graph for one contract of the protected covered call is shown below:
If the price of HP's stock increases to around the $30 range, the position can potentially be rolled in order to realize additional potential income.