HP Investors Ask, Where Is The Growth?

Aug. 9.12 | About: HP Inc. (HPQ)

HP (NYSE:HPQ) shares got a small pop yesterday as CEO Meg Whitman went through another set of writedowns, while promising a higher-than-expected operating profit.

Some $8 billion of the writedowns, and most of the 27,000 lay-offs, are in the old EDS division, bought in 2007 by former CEO Mark Hurd. Somehow investors are supposed to cheer a CEO who dismantles the last person's work.

Was this inevitable? Consider that troubled rival Dell (NASDAQ:DELL), which also bought a services company a few years ago, Perot Systems, is now in the Gartner "leaders quadrant" in two key service segments. And consider that, before they were acquired, EDS was the healthier of the two firms.

This is getting ridiculous. HP is now worth $38 billion after a decade in which it made $67 billion in acquisitions. It has become Silicon Valley's version of Shiva, the destroyer.

Antoine Gara of TheStreet.Com hints that more may be coming. As I'd guessed last year the company is making a hash of Autonomy, bought by Leo Apotheker last year for $11.7 billion. Revenues and margins are falling as former chief strategy officer Bill Veghte tries to right the ship.

The guess here is there sill be more writedowns relating to that unit, which Whitman will duly blame on Europe. Like other failing CEOs, she's always got an excuse.

But the question investors need to ask is, where's the growth? And vague promises of "cloud" don't add up to much. That's really why Steve Milunovich came back to looking at HP and dusted off his 2004 idea of selling the PC and printer businesses. It's not a question of "better together" or "smarter apart." It's a question of trying to find some value for shareholders in the wreckage of a decade's mismanagement.

His hope is that the printers might go to a Chinese company that can cut costs by moving production, and squeeze margins through ink sales as HP has done, and that low-cost owners of the old PC maker and brand can do the same. That's not a growth strategy. It's a break-up strategy.

What would be left would be the remains of Autonomy, a network storage unit, and some enterprise services. That's what Whitman is pinning her growth hopes on, too. But this is really the same kind of nonsense Digital Equipment Corp. went through back in the 1990s, when its minicomputer business began to fail under the onslaught of Windows-standard PCs. The eventual result there was the fire-sale of the company to Compaq, and Compaq's fire sale to HP. Both buyers thought "consolidation" - giving consumers fewer choices - would boost profits.

In the computer business this has never been true, and never will be true. What works in computing is what's next. There is no value in the past, none. And there is nothing but break-up value left in HP.

If you're interested in buying the HP that was, Agilent (A) (spun off in 1999) is still delivering operating cash flow, operating margins near 20%, and some interesting hints of growth in health sciences. They have a future.

HP does not. Unless you're into recycling.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.