Hewlett-Packard (NYSE:HPQ) CEO Meg Whitman has spent the last several months becoming familiar with the company's business after taking over the executive role in September. What she saw was a company divided - its efforts spread across home computers, printing and corporate computing systems.
In February, Whitman warned of radical changes ahead coupled with significant layoffs. On March 20, the company unveiled plans to merge its Images and Printing Group, which sells printers to both businesses and consumers, with its Personal Systems Group, which sells personal computers to both business and consumer clientele.
The idea is to cut costs from the overlap in Hewlett-Packard's existing manufacturing and marketing practices for its personal computers and printers. In addition to those savings, Whitman also envisions the company's PCs and printers to work better together.
The new division will be unified under the Personal Systems Group umbrella. It will be headed up by R. Todd Bradley, the current head of Hewlett-Packard's PC business. Vyomesh I. Joshi, who is currently heading up the company's imaging and printing group, will retire. Joshi has spent over 30 years with Hewlett-Packard.
The new Personal Systems Group will be the largest division in Hewlett-Packard. It is expected to account for over 50 percent of the Hewlett-Packard's revenues. In 2011, the company's PC business and printer business accounted for $65 billion in sales. In comparison, Hewlett-Packard's services group brought in $35 billion in sales while its Enterprise, Servers, Storage and Networking Group had roughly $22 billion in sales.
Hewlett-Packard has been hit hard lately by several events. There was the recent flood in Thailand which caused shortages in the company's hard disk drives. The company also had to deal with declines in consumer printing - a common occurrence during recession.
Next, and perhaps most significantly, Hewlett-Packard saw its 2010 purchase of Palm come to very little after consumers shunned tablets using the Palm software. Given that the company had spent $1.8 billion to acquire Palm, the news is far from insignificant.
The consolidation of its printing and computing business will allow Hewlett-Packard to focus its efforts more keenly on working past these issues and improving its competitive stance against companies like Apple (NASDAQ:AAPL) which, while it doesn't make its own printers, does have technology that makes it easy to print and share documents from any connected device.
It all sounds good in theory, but Hewlett-Packard hasn't set any real targets yet, or if it has those figures have not been published yet. Streamlining operations, improving branding and enhancing efficiency are lofty goals. Without some sort of tangible goal, how can anyone, including the company itself, evaluate its success in this regard? Especially given that this is Whitman's first major move, I'd have thought that at least some cost savings targets would have been announced.
I also have reservations about the company's implied switch in focus from hardware to software. Really, it is like going from being a company that makes pots and pans to being one that invents recipes - innovation in materials goods does not automatically include the ability to innovate in how those goods are used. I expect there will be some stumbling as the company finds its niche - not to mention, the company has a long road to travel.
Hewlett-Packard's revenue dropped by 7.0% from the same quarter last year, dropping comparatively lower than its peers did, on average. The loss, in turn, caused the company's earnings per share to fall almost 38% quarter over quarter - and that isn't the first time the company has lost revenue. Consensus estimates suggest that the company will turn things around going forward, but I have my doubts. Hewlett-Packard also reported a significant decline in net operating cash flow, falling over 60% from the same quarter last year.
The company, which is currently trading around $23 a share is priced low at just 5.30 times its future earnings - its industry's average forward price to earnings ratio is 13.51 - but given its low earnings growth I think this is more a reflection of the company's lack of prospects rather than a market inefficiency that can be exploited. The company does offer a 48 cents dividend (2% yield), but that is hardly enough to make up for the risk.
These reservations, combined with its current performance, makes me rate this stock a hold at best.
I'd rather put my money in a company that I think has what it takes to go to the next level - like Apple. Hewlett-Packard is trying to mirror Apple's success in many ways - why bet on the understudy?
Apple recently traded at roughly $600 a share and it is priced low relative to its expected future earnings with a forward price to earnings ratio of 12.03. Plus, Apple recently announced that it would soon start paying shareholders $2.65 a share (0.44% yield) and buy back $10 billion of its share over the next three years, starting this October.
It all sounds wonderful, plus, based on its recent performance, there is no reason to think the stock won't edge even higher. Apple has enjoyed impressive revenue growth, beating out its industry's average for the same period (73.3% vs. 73.1%). In turn, that growth boosted its earnings per share and is outpacing its industry in a number of areas, from its expanding profit margins to its return on equity.
For those not encouraged by Apple (hey, they do exist), I'd recommend Dell (NASDAQ:DELL) before advising anyone to buy into Hewlett-Packard right now. Dell recently traded at roughly $16.50 a share. It doesn't pay a dividend, but it is priced low with a price to earnings ratio of less than 9. While the company's revenue growth left something to be desired at just 2.2%, the company has recently enjoyed an increasing return on equity and it has good cash flow from operations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.