Hewlett-Packard: Valley Or Cliff?

Aug.22.12 | About: HP Inc. (HPQ)

Hewlett-Packard's (NYSE:HPQ) future is foggy at this point. Is the company trudging in the fog in the valley or walking gingerly on the edge of a precipice with a great chasm below? HP's decision to bring in former eBay (NASDAQ:EBAY) captain Meg Whitman looks like a good decision but it is too early to tell if Ms. Whitman can get all of the troops rowing in the same direction. Ms. Whitman's plan to combine the PC and printer businesses appears to be a good strategy, as she noted in the company's Q2 2012 earnings call that the PC business could help the printer business, as the PC business has a broader and deeper footprint than the printer business.

Meg Whitman noted the company appears to be stabilizing, but would not go so far as to say the corner has been turned. Ms. Whitman did mention the company needed to do a better job of aligning innovation with business. The company reported quarterly revenue of $30.7 billion, which was down 3% when compared to the same period a year ago. America revenue was flat, EMEA was down 7% and Asia Pacific was down 1%. HP plans to reduce the company's workforce by 27,000 by the end of 2014, which will be realized via layoffs and voluntary early retirement incentives.

On a bright note, software revenue grew 22% year-over-year and HP's data analytics acquisition Autonomy appears to have a bright future, but is having some growing pains. The company also plans to increase its R&D budget substantially and has a new CRM system targeted for improving sales.

In recent past earnings calls, Hewlett-Packard noted hard disk drive supply issues related to flooding in Thailand as a reason for poor performance, but according to information technology and digital storage company EMC (NYSE:EMC), discussed in this article, hard disk supply issues are in the rear-view mirror. So for this quarter, HP should not be able to use hard disk drive supply as an issue for poor performance, although the company will probably reference issues in Europe and China as reasons for poor performance, should that be the case.

HP's competitor Dell (NASDAQ:DELL), discussed here, had some gloomy results to report yesterday with revenue down 8% year-over-year, so Hewlett-Packard's short-term prospects aren't looking too good at this point.

Hewlett-Packard's stock price is down significantly this year (shown below) as well as over the last two years.

With Hewlett-Packard's earnings release today, an investor might consider a long straddle, as it will pay a return if the stock drops significantly in price or increases significantly in price. A note of warning, a straddle trade is more of a speculative trade than a collar, married put, etc., so this trade is more of a Vegas type option investment. A straddle may be entered by purchasing a call option and a put option with the same strike price.

Using PowerOptions, a couple of straddle opportunities are available for Hewlett-Packard for September of 2012 as shown below:

With Dell's recent negativity, the second position looks a little more attractive, as it has a higher "lower break-even" point of $18.10 than the first position's "lower break-even" point of $17.17. The long straddle may be entered by purchasing the 2012 Sep 20 call option at $0.59 and purchasing the 2012 Sep put option at $1.31.

HPQ Long Straddle Trade

  • Buy HPQ 2012 Sep 20 Call at $0.59
  • Buy HPQ 2012 Sep 20 Put at $1.31

A profit/loss graph for one contract of the HP long straddle is shown below:

Click to enlarge
(Click to enlarge)

The long straddle position is profitable for a stock price below $18.10 and above $21.90.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.