There has been a great deal of ink spilled recently discussing the valuation of Hewlett-Packard (HPQ) stock. It is currently trading near 52 week lows at just over $14 a share. It has a price-to-book value well under 1, which, for a large cap stock, definitely makes you stop and take a look and realize the inherent value. Given the amount of corporate upheavals the company has recently gone through, a low stock price is not a surprise. The value is there, and the management is settling in to do good things in the future. It is hard to turn a good deal like HP down, and the smart investor will see this as a great value opportunity.
HP built its reputation on the "HP-Way" with focus on employees, a decentralized system, and a commitment to build products to improve humanity. This was reflected in the engineering and research and development oriented culture at HP for a long time and helped HP innovate and stay ahead of the technological trends. However, in recent times, this focus on R&D has faded, with HP scrambling to play catch up to its competition through acquisitions. Consider HP's research and development expenditure: HP spent close to 6% of its revenues on research and development in 2002, in 2011 research and development expenditure was down to 2.5%.
In recent times Hewlett Packard has sought to remake itself in the image of IBM (IBM) by adding various complementary services and building up capabilities in the areas that it lacked in a constant sort of expansion. It bought out Autonomy last year for $10.3 billion so it can compete in the Cloud computing and business analytic services, along with Amazon (AMZN) and IBM. Its acquisition of EDS for $14 billion in 2008 is still fresh as HP is trying to bulk up its software services business. With acquisition of 3Com, HP tried to position itself in the networking segment. Its PC business and even its historically lucrative printer and ink business have suffered in recent times and HP has actually lost market share in virtually all the segments that it competes in. The top level management turnover has not helped stabilize the situation either.
Instead of building on its strengths, HP has tried to increase its heft through acquisitions.
HP still has a ways to go to look attractive on its balance sheet. Of the total assets of $129 Billion roughly 43%, $55.3 billion is goodwill and intangibles. But it is true that HP is one of the most valuable brands in the world, and most certainly does have that sort of value. At the same time, goodwill in the amount over $44 billion represents the premium HP shelled out during its various acquisitions. The end result of all these acquisitions has been declining value in all segments so far. Can HP turn it around?
The good news comes in looking at the price to book ratio, sitting at 1.2. This ratio is very attractive for a company with a market cap of almost $28 billion.
When you compare HP to a couple of its competitors you will find that they too have been plagued with sluggish growth and earnings. Dell (DELL) has seen earnings decline 18% due to poor consumer sales. Cisco Systems (CSCO) also saw earnings decline earlier in the fiscal year but has pulled out of their sluggishness primarily by increasing sales in the cloud computing environment.
Despite the poor sales figures, HP has seen a flurry of insider buys. Over 18 million shares have been purchased by insiders over the previous 6 months. Insider buys are an important indicator for investors. I believe the insiders know that HP is positioning itself to capitalize on the booming cloud computing market and that they also see the new leadership team at HP as one that will transform the company into a dynamic player going forward. The tech field will be growing fast in the coming years, and HP is positioned to take advantage.
HP has already announced its first steps towards becoming a major player in the cloud computing sector. Officially called the HP Converged Cloud Services for Airlines, their new service will allow airliners to combine inventory and reservation systems into one integrated network, in the hope that efficiency gains and cost savings can be achieved. Additionally, the company is pushing to be the sole provider of cloud-based storage services to airliners. This move is a game changer for HP and provides the foundation on which it will build itself into a cloud computing giant.
As far as the new management team, we know that Carly Fiorina was a disaster. Other CEOs in the interim failed to arrest HP's decline. Can Meg Whitman succeed in returning HP to its former position in the market? This is the big question.
I believe that Meg will prove that she is the transformational leader that HP needs at this time. She will resemble someone like Lou Gerstner at IBM. HP needs to return to its core and Whitman understands just that, both to HP and also to a tech company with significant hardware based revenues. The vision is to return to the hardware based leader that HP once was, and HP is well on its way toward achieving that goal.
HP is on the cusp of mounting a great turnaround, and there is already evidence of this in progress. HP presents real value in the market currently, and as the new management team opens up new avenues of growth while staying true to HP's core values and mission it's very easy to see that HP will soon be back on top.