HP A Bad Buy As Profits Continue Declining

| About: HP Inc. (HPQ)

Hewlett Packard (NYSE:HPQ) is a diversified computer company which is best known for its personal computers and printers. Hewlett Packard's headquarters are in Palo Alto, California. The company has a market cap of $28.9 billion, and its stock price is around $14.

Over the course of the last year, Hewlett Packard's stock price has plummeted by more than 40%. In the last week, the stock price took another hit. The hit to the stock price came after an October 3rd analyst's conference in which Hewlett's Packard's CEO Meg Whitman, "said income would be below analyst estimates and that her company lacked 'competitive focus'." This announcement came after a slew of bad news for the company, and it seemed to be the straw that broke the camel's back. Hewlett Packard's stock price began dropping during the news conference, and by the end of the day it had fallen by $2.22 or 14.8%. During the course of the day, the stock hit a 52 week low of $14.24, and over 141 million shares were traded.

The loss that was suffered by Hewlett Packard's stock was stunning but not as stunning as the news that was delivered by Ms. Whitman and her CFO Cathy Lesjak. Ms. Whitman said: "Expect a broad-based profit decline in 2013." She went on to tell the investors "real recovery and expansion at HP" would not happen until 2014. She believed that by 2014, the company's R&D and IT will have begun to kick in.

After Ms. Whitman spoke, Cathy Lesjak gave the much-anticipated financial guidance. In May of 2012, the company adopted a multiyear restructuring plan. She went on to say: "We expect $1.5 billion in restructuring in FY 2013. We expect 26,000 people to leave the company as part of the restructuring. Expect $2.7 billion more in restructuring costs." Ms. Lesjak then laid out the company's 2013 guidance. "We expect continued weakness in the macroeconomic environment. We expect year-on-year revenue declines in all segments except software." In 2013, the company is expecting Non-GAAP EPS $3.40-$3.60. This guidance was well below the $4.00 per share that analysts were predicting. Hewlett Packard has predicted that in 2012, its earnings will be $4.05 to $4.07 per share.

In addition, "Bonds of Hewlett-Packard have dropped 0.64 percent this week, more than the 0.17 percent decline for all investment- grade technology firms, including Dell (NASDAQ:DELL)." It seems that investors are becoming worried about whether Hewlett Packard will be able to turn it around. At the end of the second quarter, the company's debt totaled $29.78 billion, which exceeded the company's earnings by 2.17 times. Hewlett Packard's current credit rating from Moody's is A3 while its rating from Standard & Poor's is BBB+ or one level lower. This compares to its close competitor Dell which has an A2 rating from Moody's and an A- rating from Standard & Poor's. The lower credit ratings will force Hewlett Packard to spend money that it had budgeted for restructuring, to service its debt.

Recent news for Hewlett Packard

After the analyst's meeting, downgrades for Hewlett Packard's stock started pouring in:

On October 5th, Argus Research's Jim Kelleher cut his rating on the stock from buy to hold, writing that the turnaround "will take longer than previously expected" and that there are "no quick fixes".

On October 5th, Sterne Agee's Shaw Wu writes: today he is "reluctantly" cutting the stock to Neutral from Buy, estimating the stock to be worth $15, counting projected trading multiples for different parts of the business, plus $7 per share in net debt. But, if one applies a 30% "private equity" or "liquidity" discount to account for the heavy debt load, fair value drops to $10.

On October 5th, celebrity stock analysts Jim Cramer said shares have no reason for being owned, subsequent to his interview with the firm's Chief Executive Meg Whitman, as he maintains that she offered no justification for buying them. Cramer added that HP will probably not be able to "turn things around" until 2014.

On October 4th news came out that Barclays thinks HP's dismal Enterprise Services guidance "highlights structural issues" unique to the company and notes FY13 free cash flow guidance is well below EPS guidance. HP now has a market cap of just $28.3B or a mere 0.23x estimated FY12 revenue.

On October 4th, Moody's responded to HP's poor FY13 guidance by placing the IT giant's debt ratings, which vary based on debt type, under review for possible downgrade. It should be noted that Hewlett Packard has $9.5 billion in cash and equivalents and still has a healthy free cash flow.

On October 3rd, coming off the biggest quarterly loss in Hewlett-Packard's history, CEO Meg Whitman braced investors for even more trouble ahead as she methodically tries to fix a wide range of longstanding problems. Those challenges will be compounded by a feeble economy that Whitman expects to weaken even more during the next year.

On October 3rd Hewlett Packard's stock prices dropped by 14.8% after Meg Whitman declared FY13 to be a "fix and rebuild" year that will see a broad-based profit decline (centered around enterprise services) and has, again, made cautious remarks about European and Chinese demand.


In the last week, Hewlett Packard's stock price lost 16% of its value and hit a 52 week low of $14.24. The last time Hewlett Packard's stock price was that low was in 2001. It seems that investors have finally come to the conclusion that Hewlett Packard is a technology company whose technology is out of date. When the computing world advanced towards Cloud computing and the use of smartphones and tablet computers Hewlett Packard failed to see the trend. Other companies such as Nokia (NYSE:NOK), Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Dell, also failed to see the emerging trend towards Cloud computing and have paid the price.

Ms. Whitman wants to turn the company around, and at the October 3rd analyst meeting, she talked about the company's, "Three big themes going forward: Cloud, Security, and Information." Ms. Whitman's plans for the future sound fine, but they are too futuristic, and they will not bolster the company's stock price.

In August, the company reported a second quarter loss of $8.85 billion, and then they announced dismal future predictions. Then, in the October 3rd analyst meeting, the company confirmed what investors had already suspected. The company is looking at decreasing earnings, a high debt load, and an uncertain future. I think Hewlett Packard's stock will sink even lower, and I recommend against buying the stock.

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.