Seriously, Can Hewlett-Packard Be This Cheap? [View article]
In the short term, market sentiments reign.
In the long term, business fundamentals prevail.
When Lou Gerstner took over IBM in 1993, he was faced with a cumulative loss of $16B in the previous 8 quarters, and had had to lay off 70,000 staff in the following 8 quarters. He made one critical decision, to keep IBM as ONE company.
Whitman's turnaround challenge is much easier compared to that of Gerstner. The company is still achieving 9+% operating margin, merging PC and Printing business to create a superb Global # 1 leverage on the supply chain and global distribution channel will generate higher ROI. 30,000+ staff cut is being undertaken now, although which is unfortunate for the families affected. Future growth areas such as Security, Cloud Computing and select Software areas had been singled out.
Lou Gerstner is not an engineer and he made it. Lou has a superb talent that seems to also exist on Whitman, namely, "being able to see things as a WHOLE". Whitman used to be VP of Strategy at Proctor & Gamble, that position also demands similar talent.
One thing I applaud is Whitman's decision to eliminate executive suites and now all executives are in cubicles, a great Silicon Valley tradition pioneered by Intel.
A better way to gauge a stock's potential is to use the "Total Return" framework, i.e., annual dividend yield + annual EPS growth rate, rather than a minimum fixed dividend yield requirement. Otherwise, Warren Buffett wouldn't be the No. 1 holder of IBM stock now.
IBM's superior free cash flow generation capability enables it to continue to engage in sizable stock buybacks, which in turn will trigger superior EPS growth rates better than its peers. Thus the capital appreciation prospect for IBM is better than the market average.
To judge a stock's prospect, it is better off to look at both the dividend yield and the capital appreciation potential, not just the dividend alone. The author bought IBM at $80 in early 2009 via this Total Return framework and made a fairly good return on IBM, Buffett started to invest in IBM in early 2011 and now is the No. 1 shareholder of IBM.
Did Buffett Buy IBM Because Of The Economy? [View article]
IMHO, Buffett bought IBM mainly because of its highly resilient and sustainable business model that will produce a stream of growing EPS' for its sharesholders year after year. As roughly 70% of IBM revenue is from long-term service or equipment lease contracts, it is also much recession-proof compared to other types of business model. As a matter of fact, IBM's revenue didn't drop during the 2008/2009 financial tsunami due to the facts mentioned above.
You don't need to raise a cow in order to drink milk. There are a lot of negative consequences attached to the MMI acquisition. It makes the whole business model of Google harder to optimize, Android partners alienated, and financial indicators going in the negative directions. The net result will be the eventual loss of the capability to generate sustainable EPS growths.
It appears that Google is doing exactly the opposite of what IBM has done since 2000. Over the past 10 years, IBM's revenue hadn't really grown much. 10 years ago, roughly 40% of IBM's revenue was contributed by the low-margin PC, hard disk and DRAM business. Today, they were replaced mostly by high-margin software and service contracts. Even though IBM didn't grow its gross revenue much in the past 10 years, its EPS has grown by more than 150% in the same period. In the end, it is the EPS which is the primary driver for stock price, not revenue.
Google has a lot to learn from IBM regarding how to pursue smart acquisitions that will facilitate Business Model Optimization, not the other way around.
Hewlett Packard's Strategic Shift Is A Big Mistake [View article]
Hi Neal,
Excellent write-up about HPQ!
I guess one thing a lot of people getting confused is about the fact that "low margins multiplied by high inventory turn-over will yield superb ROE figures", so gross margins are only one element in the total equation, and ROE is the end-game.
Both DELL and WMT have low margins and high ROE's, and I bet HPQ's PC business should contribute much more to the company's overall ROE, because its inventory turnover is high compared to the rest of HPQ's so-called high margin business units.
Per the strategy guru Professor Bruce Greenwald of Columbia University who chairs up its Value Investing Program where Warren Buffett offers a free 3-hour seminar each semester, Economy-of-Scale is one type of "Wide Moat" dreamed by any businesses. HPQ voluntarilty gave that wide moat away, at a great loss to its shareholders, because its CEO's wrong strategic vision and his poor handling of the planned divestiture.
Ever since Leo Apotheker had taken the CEO seat of HP for about 6 months, I have been warning all my friends to exit HPQ, because as a 20-year veteran in the field of Business Model Optimization research, Apotheker has demonstrated that he is good at taking the opposite direction of wealth creation for its shareholders.
As a big admirer of IBM's tremendous turnaround during 1993-1995, it is indeed too late for HP to chase after IBM, 15+ years later into the same game. Any fresh MBA students can tell that hard fact.
HP's Best Recovery Plan: Ignore The Analysts [View article]
Adam,
This is the most sensible article about HPQ that I have read in the past two months!
Judging from a Business Model Optimization perspective, a field that I have been doing active research during the past 20 years, Meg Whitman is doing all the right things. The PC and Printing business are virtually already spun off because Whitman assigned a very capable executive to run it so she can focus on fixing the Service and Autonomy part. And the PC+Printing business will continue to be cash cows for the company, to support the needed capital for the enterprise units, on top of the purchasing power synergy.
I bought a lot of 2014 HPQ Long Calls when HPQ dropped to $11.35, and that investment has already more than doubled in 3 weeks.
Most analysts are not insightful in their analysis, and tend to just echo the market sentiments rather than providing professional guidance's.
Look forward to reading more of your insightful articles!
Hewlett-Packard: What About The Company's R&D Tradition? [View article]
Tom, Thanks for another insightful analysis article! Whitman so far has demonstrated that she is a quite competent Business Model Optimizer for HP: 1. Recognize and solidify its core 2. Cut unneessary costs 3. Grow the core with saved costs 4. She does recognize that innovation and customer needs are the true drivers for HP's future. Whitman is just undoing the great damages to HP by its three ex-CEOs-- 1. Fiorina-- Recognize the wrong core and pursued it fiercely 2. Hurd-- Cut the R&D roots, not costs 3. Appotheker-- Try to turn HP into a pure software business that he is familiar with without recognizing the company's core; totally an incompetent CEO.
As a Business Model Optimization researcher for over 20 years, so far I haven't been able to find major faults with Whitman's turnaround plans.
Lions and Tigers and Cisco Bears, Oh My! [View article]
Indeed very insightful analysis about CSCO.!
Value Investors are inherently a small minority in our society, and exactly that is what really made true Value Investors fortunate ones to make great returns over the longer term.
A straight logic from the Information Theory, the value of a piece of information is inversely proportional to how many people know about it. The fewer it is the more valuable it becomes.
If the majority of stock investors are of the same kind of Value Investing mindset like Buffett, then the Oracle of Omaha today is probably just a multi-millionaire, not multi-billionaire for sure.
Again, this is a great article speaking out of the guts of a descent Value Investor, and the value of this article is proportional to how unpopular it is against the mainstream crowd.
How Healthy Is Hewlett-Packard's Financial Condition? [View article]
In the most recent conference call, HP's CFO stated that HP will be essentially debt-free by EOY2013, because a good portion of HP's long-term debt is from HP Finance Corp.
HP Finance borrows money at very low interest rates from the banks and then lease out HP equipment to the corporate customers at higher interest rates, and the credit rating of those corporate customers are generally very good. So this kind of debt is generally collateralized by customer assets and basically a debt pass-through, which is not the same kind of debt that HP borrows from the banks to buy new properties or build new plants.
China Downgraded By JP Morgan After ETF Falls 12% [View article]
Why people want to invest in a country that frauds are everywhere? Government GDP figures, corporate earnings and assets, etc.
Caterpillar just recently wrote off more than $600M for a China-based factory that was traded in HK Stock Exchange, because they later on found most of the reported assets were just non-existing.
I lost more than 80% of my investment in a NYSE-listed Chinese education service company (CEU) which later on was found to be a fraud and de-listed, just one among 30+ fraudulent Chinese companies listed in the US in the past two years.
It will be many years for China-based companies to have transparent corporate governance and sincere management integrity. Until then, I will not make a dime of investment in China related stocks.
4 Reasons To Buy Hewlett-Packard Shares On Excessive Bearishness [View article]
In a nutshell, HP has two business segments, namely, Consumer Products(PC and Printer) and Enterprise Solutions (all the rest BU's). Each has roughly $60B annual revenue and 9-10% operating profits.
The Consumer Products business has the No. 1 world leadership position and even it may not grow at all or will just slowly decline, it will be a great CASH COW to continue to generate free cash flows for the rest of HP to innovate and grow. But its bloated workforce is just too big to bear so Whitman had to take big staff cuts, although not good for many families, but unfortunately that is what a responsible CEO like Whitman had to do.
Whitman had stressed many times with press interviews, that HP cannot simply copy IBM or APPLE for its turnaround because each got it current success via endeavors put in more than 15 years ago. As far as I can tell as a 20-year Business Model Optimization research veteran, Whitman really has been doing all the right things so far, but the challenge to undo all the damages left over from the three ex-CEO's is certainly not an easy task. But my gut feeling is that she will prove out her way by EOY2013, when more solid progresses are expressible in numbers. Win-8 PC and Tablets release may be a near-term catalyst for HPQ.
If Wintel PC ecosystem is likely to fail very fast, the valuation of MSFT and INTC should go down significantly.
This reminds me of the August 2011 US Credit Downgrade fiasco, so many of my friends just sold their stocks after losing 20% value in just 1 week. I told them to hold but they were all panic and didn't listen.
My logic to hold was quite simple. If the fear is due to US Credit Downgrade, then US Treasury Bills would become junks and very few would want to buy. Instead the whole world went to buy US T-bills and the yields actually dropped, because most investors were panic and they all jumped on the perceived most secure bandwagon in the world, the US T-bill, which was just downgraded and caused all the fear. As long as there is no other country to replace US' world leadership position, US will be the most secure place to park people's money.
If most investors are still comfortable in assigning reasonable valuation levels to INTC and MSFT, the sky won't fall for HPQ. On top of that, Whitman is a savvy CEO with good Business Model Optimization judgment and leadership skills. Besides, HPQ still has a $60B Enterprise Solutions business that is the source of good growth potential in the future, most likely it will fare out better than PC business.
CSCO just followed IBM to transition from a growth stock to an ROI stock. Enterprise market tends to be much more stable and sustainable compared to Consumer market, so even MSFT, INTC and AAPL seem to be more attractive today, it is harder to ascertain that things will remain the same 10 years from now. IBM's and CSCO's Enterprise centric business models are much more sustainable than Consumer centric technology companies. Just my 2-cent opinion.
Seriously, Can Hewlett-Packard Be This Cheap? [View article]
In the long term, business fundamentals prevail.
When Lou Gerstner took over IBM in 1993, he was faced with a cumulative loss of $16B in the previous 8 quarters, and had had to lay off 70,000 staff in the following 8 quarters. He made one critical decision, to keep IBM as ONE company.
Whitman's turnaround challenge is much easier compared to that of Gerstner. The company is still achieving 9+% operating margin, merging PC and Printing business to create a superb Global # 1 leverage on the supply chain and global distribution channel will generate higher ROI. 30,000+ staff cut is being undertaken now, although which is unfortunate for the families affected. Future growth areas such as Security, Cloud Computing and select Software areas had been singled out.
Lou Gerstner is not an engineer and he made it. Lou has a superb talent that seems to also exist on Whitman, namely, "being able to see things as a WHOLE". Whitman used to be VP of Strategy at Proctor & Gamble, that position also demands similar talent.
One thing I applaud is Whitman's decision to eliminate executive suites and now all executives are in cubicles, a great Silicon Valley tradition pioneered by Intel.
Want to Seek 'Significant' Alpha? Look Beyond Dividend Stocks [View article]
Another seminal article from you! Look forward to your next one on how to build a high quality fastest growing stocks portfolio!
Is IBM A Promising Dividend Stock? [View article]
IBM's superior free cash flow generation capability enables it to continue to engage in sizable stock buybacks, which in turn will trigger superior EPS growth rates better than its peers. Thus the capital appreciation prospect for IBM is better than the market average.
To judge a stock's prospect, it is better off to look at both the dividend yield and the capital appreciation potential, not just the dividend alone. The author bought IBM at $80 in early 2009 via this Total Return framework and made a fairly good return on IBM, Buffett started to invest in IBM in early 2011 and now is the No. 1 shareholder of IBM.
C.T. Wu, PhD
Weighing The Week Ahead: High Hopes For Housing [View article]
Your weekly articles are the cream-of-crops among Seekingalpha's. Thanks for your generous sharing of your hard earned insights!
CT
Did Buffett Buy IBM Because Of The Economy? [View article]
The Google Transition [View article]
You don't need to raise a cow in order to drink milk. There are a lot of negative consequences attached to the MMI acquisition. It makes the whole business model of Google harder to optimize, Android partners alienated, and financial indicators going in the negative directions. The net result will be the eventual loss of the capability to generate sustainable EPS growths.
It appears that Google is doing exactly the opposite of what IBM has done since 2000. Over the past 10 years, IBM's revenue hadn't really grown much. 10 years ago, roughly 40% of IBM's revenue was contributed by the low-margin PC, hard disk and DRAM business. Today, they were replaced mostly by high-margin software and service contracts. Even though IBM didn't grow its gross revenue much in the past 10 years, its EPS has grown by more than 150% in the same period. In the end, it is the EPS which is the primary driver for stock price, not revenue.
Google has a lot to learn from IBM regarding how to pursue smart acquisitions that will facilitate Business Model Optimization, not the other way around.
Hewlett Packard's Strategic Shift Is A Big Mistake [View article]
Excellent write-up about HPQ!
I guess one thing a lot of people getting confused is about the fact that "low margins multiplied by high inventory turn-over will yield superb ROE figures", so gross margins are only one element in the total equation, and ROE is the end-game.
Both DELL and WMT have low margins and high ROE's, and I bet HPQ's PC business should contribute much more to the company's overall ROE, because its inventory turnover is high compared to the rest of HPQ's so-called high margin business units.
Per the strategy guru Professor Bruce Greenwald of Columbia University who chairs up its Value Investing Program where Warren Buffett offers a free 3-hour seminar each semester, Economy-of-Scale is one type of "Wide Moat" dreamed by any businesses. HPQ voluntarilty gave that wide moat away, at a great loss to its shareholders, because its CEO's wrong strategic vision and his poor handling of the planned divestiture.
Ever since Leo Apotheker had taken the CEO seat of HP for about 6 months, I have been warning all my friends to exit HPQ, because as a 20-year veteran in the field of Business Model Optimization research, Apotheker has demonstrated that he is good at taking the opposite direction of wealth creation for its shareholders.
As a big admirer of IBM's tremendous turnaround during 1993-1995, it is indeed too late for HP to chase after IBM, 15+ years later into the same game. Any fresh MBA students can tell that hard fact.
CT
HP's Best Recovery Plan: Ignore The Analysts [View article]
This is the most sensible article about HPQ that I have read in the past two months!
Judging from a Business Model Optimization perspective, a field that I have been doing active research during the past 20 years, Meg Whitman is doing all the right things. The PC and Printing business are virtually already spun off because Whitman assigned a very capable executive to run it so she can focus on fixing the Service and Autonomy part. And the PC+Printing business will continue to be cash cows for the company, to support the needed capital for the enterprise units, on top of the purchasing power synergy.
I bought a lot of 2014 HPQ Long Calls when HPQ dropped to $11.35, and that investment has already more than doubled in 3 weeks.
Most analysts are not insightful in their analysis, and tend to just echo the market sentiments rather than providing professional guidance's.
Look forward to reading more of your insightful articles!
CT
Hewlett-Packard: What About The Company's R&D Tradition? [View article]
Thanks for another insightful analysis article!
Whitman so far has demonstrated that she is a quite competent Business Model Optimizer for HP:
1. Recognize and solidify its core
2. Cut unneessary costs
3. Grow the core with saved costs
4. She does recognize that innovation and customer needs are the true drivers for HP's future.
Whitman is just undoing the great damages to HP by its three ex-CEOs--
1. Fiorina-- Recognize the wrong core and pursued it fiercely
2. Hurd-- Cut the R&D roots, not costs
3. Appotheker-- Try to turn HP into a pure software business that he is familiar with without recognizing the company's core; totally an incompetent CEO.
As a Business Model Optimization researcher for over 20 years, so far I haven't been able to find major faults with Whitman's turnaround plans.
Lions and Tigers and Cisco Bears, Oh My! [View article]
Value Investors are inherently a small minority in our society, and exactly that is what really made true Value Investors fortunate ones to make great returns over the longer term.
A straight logic from the Information Theory, the value of a piece of information is inversely proportional to how many people know about it. The fewer it is the more valuable it becomes.
If the majority of stock investors are of the same kind of Value Investing mindset like Buffett, then the Oracle of Omaha today is probably just a multi-millionaire, not multi-billionaire for sure.
Again, this is a great article speaking out of the guts of a descent Value Investor, and the value of this article is proportional to how unpopular it is against the mainstream crowd.
How Healthy Is Hewlett-Packard's Financial Condition? [View article]
HP Finance borrows money at very low interest rates from the banks and then lease out HP equipment to the corporate customers at higher interest rates, and the credit rating of those corporate customers are generally very good. So this kind of debt is generally collateralized by customer assets and basically a debt pass-through, which is not the same kind of debt that HP borrows from the banks to buy new properties or build new plants.
China Downgraded By JP Morgan After ETF Falls 12% [View article]
Caterpillar just recently wrote off more than $600M for a China-based factory that was traded in HK Stock Exchange, because they later on found most of the reported assets were just non-existing.
I lost more than 80% of my investment in a NYSE-listed Chinese education service company (CEU) which later on was found to be a fraud and de-listed, just one among 30+ fraudulent Chinese companies listed in the US in the past two years.
It will be many years for China-based companies to have transparent corporate governance and sincere management integrity. Until then, I will not make a dime of investment in China related stocks.
C.T. Wu, PhD
4 Reasons To Buy Hewlett-Packard Shares On Excessive Bearishness [View article]
The Consumer Products business has the No. 1 world leadership position and even it may not grow at all or will just slowly decline, it will be a great CASH COW to continue to generate free cash flows for the rest of HP to innovate and grow. But its bloated workforce is just too big to bear so Whitman had to take big staff cuts, although not good for many families, but unfortunately that is what a responsible CEO like Whitman had to do.
Whitman had stressed many times with press interviews, that HP cannot simply copy IBM or APPLE for its turnaround because each got it current success via endeavors put in more than 15 years ago. As far as I can tell as a 20-year Business Model Optimization research veteran, Whitman really has been doing all the right things so far, but the challenge to undo all the damages left over from the three ex-CEO's is certainly not an easy task. But my gut feeling is that she will prove out her way by EOY2013, when more solid progresses are expressible in numbers. Win-8 PC and Tablets release may be a near-term catalyst for HPQ.
If Wintel PC ecosystem is likely to fail very fast, the valuation of MSFT and INTC should go down significantly.
This reminds me of the August 2011 US Credit Downgrade fiasco, so many of my friends just sold their stocks after losing 20% value in just 1 week. I told them to hold but they were all panic and didn't listen.
My logic to hold was quite simple. If the fear is due to US Credit Downgrade, then US Treasury Bills would become junks and very few would want to buy. Instead the whole world went to buy US T-bills and the yields actually dropped, because most investors were panic and they all jumped on the perceived most secure bandwagon in the world, the US T-bill, which was just downgraded and caused all the fear. As long as there is no other country to replace US' world leadership position, US will be the most secure place to park people's money.
If most investors are still comfortable in assigning reasonable valuation levels to INTC and MSFT, the sky won't fall for HPQ. On top of that, Whitman is a savvy CEO with good Business Model Optimization judgment and leadership skills. Besides, HPQ still has a $60B Enterprise Solutions business that is the source of good growth potential in the future, most likely it will fare out better than PC business.
Cisco's Dividend Hiding Larger Issues? [View article]
The Performance Analytics Return Model Report: 6-Month Expected Return Improves Slightly, Still Negative [View article]
Very good reference material for 6-month equity investment planning.!
How do you define the "earning quality"?
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