Inconsistencies are always seen as a big red flag in a company. A change of management can sometimes help the company by giving it a new direction although having three chief executives in a span of two years is barely an indicator of health for any large corporations. A stable management and positive direction always pacifies any doubt in the market.
Hewlett-Packard (HPQ) has lost around 45% of its value in the past year and currently trades around the $20 mark. It had hit its 52-week low on Thursday, June 28, 2012 with a little above $19 per share. The trailing 12-months (TTM) price-to-earnings ratio is well under 10 at 7.8, with a more relevant forward multiple of only 4.5 displaying the loss of confidence of the investors to its management.
The turmoil in Hewlett-Packard started around the turn of the century with the resignation of then chief executive officer (CEO) Lewis E. Platt in 1999 and was succeeded by Carleton S. Fiorina of Lucent technologies. A few months after taking the post, Carly, as most people call her, have successfully spined-off Agilent Technologies (A) and in 2001, brokered a merger of Hewlett-Packard and Compaq which is estimated to be a $25 billion deal. Carly was removed by the board from the company on February 2005; the news of the removal was greeted positively by investors which increased Hewlett-Packard's share price by around 7%. Under Carly the company's earnings per share (EPS) fell by almost 25%, from $1.54 in 1999 to $1.16 in 2004.
Mark Hurd ensued after. Mark's legacy in the corporation is his improvement of the company's operating efficiency and its financial performance and re-focusing in customer satisfaction. The results increased growth and profitability, greater value for shareholders and customers, and a stronger competitive position in global IT markets. Between the company's 2004 and 2009 fiscal years, Hewlett-Packard grew revenue from $80 billion to $114.6 billion and grew its multiple in four out of his five years leading the company. He increased its EPS from $.83 in 2005 when he took over the company to an all-time company record of $3.69 in 2010, when Hurd was forced to resign due to allegations of impropriety. Hurd joined Oracle (ORCL) after.
Léo Apotheker succeeded Mark Hurd as chief executive in late 2010. He was picked off after being let go by SAP. Léo served as Hewlett-Packard's CEO for less than a year in which the company's shareholders experienced a 43% loss in share price, equivalent to $32 billion in market capitalization. Léo's short lived career with Hewlett-Packard was due to his expensive acquisition of British firm Autonomy, his string of disappointing quarters and confusing announcements such as discontinuing its webOS product line (mobile phones and tablet computers) and proposal to sell or spin off its consumer personal computing division to focus in enterprise software development. Hewlett-Packard's board replaced Léo with its current CEO Meg Whitman.
Meg's path for Hewlett-Packard turnaround will start with "making radically new consumer products" such as cloud computing technologies targeting start-up companies. She also said that the personal computing business of Hewlett-Packard will stay as the company will focus on some of its core business in selling computers and laptops. HP will also reduce the number of products and models it will sell, which Meg expects to create leverage in the market as it focuses on a specific market segment.
After two quarters with Meg, the stock is still on the same level from the time she took over the company. To make matters worse, Hewlett-Packard's shares are currently trading in its 52-week low. Compared against its competitors: IBM, Dell (DELL) and Apple (AAPL) which has an earnings multiple of 11.5, 6.8 and 13.91 respectively, Hewlett-Packard and Dell are currently undervalued while IBM and Apple are fairly valued.
Apple has the largest market capitalization of around $534 billion and an estimated value of $505 billion. It's currently trading at $570 which is 70% higher than last year. Its first quarter revenue grew by 58.9% due to the popularity of its mobile devices such as iPad and iPhone. IBM on the other hand has an enterprise value of $242 billion with market capitalization of around $221 billion. It is currently valued at $191 per share, which is 14% higher than last year. It has a forward annual dividend rate of 3.4. Dell which lost a quarter of its stock value is trading a little less than $12 per share. It has a market capitalization of around $21 billion and is estimated to be worth $16 billion. Hewlett-Packard which is bordering at $20 per share has a market capitalization of $38 billion and is valued at $60 billion. Both Dell and Apple started a dividend lately.
Hewlett-Packard's latest quarterly revenue dropped by 3% year-on-year which negatively affected the earnings per share of the company by about 23.8% from last quarter. During the past fiscal year, Hewlett-Packard reported lower earnings of $3.27 versus $3.69 in the previous year. This year, the market expects an improvement in earnings to around $4 from $3.27.
Current return on equity (ROE) is lower than its ROE from the same quarter last year. In comparison to the other companies in the Computers & Peripherals industry and the overall market, Hewlett-Packard's return on equity is significantly below that of the industry average and is below that of the S&P 500. Its net income has significantly decreased by roughly 31% against the same period last year, falling from $2.3 billion to $1.6 billion.
In May 23, 2012, Hewlett-Packard announces plans to cut 27,000 workers, or 8 percent of its work force, as the growing popularity of smartphones, tablets and other mobile devices makes it tougher for the company to sell personal computers. Revenue in the PC division was flat as revenue from consumer products fell 4 percent, offset by a 3 percent increase in revenue from businesses. The restructuring is expected to generate annualized savings between $3 and $3.5 billion after 2014.
The good news for Hewlett-Packard is that it is now due for a bounce higher. I suggest holding onto Hewlett-Packard shares.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.