Dell And HP Earnings Results Show Importance Of Leadership And Cost Cutting

by: Benjamin Goldman

Dell (DELL) and Hewlett Packard (NYSE:HPQ) got very different reactions after their earnings reports. For Dell, it was more of the same: lowered outlooks and flat earnings. As a result, shares plunged over 17 percent on May 23rd. HP, despite lower revenue and earnings, got a big boost in after hours trading after announcing a plan to lay off workers in order to cut costs and boost revenue. In this article, I explain why HP will continue to outperform Dell in the near future unless Dell makes some major changes.

Both Dell and HP have strongly underperformed in the past few months. Both stocks are down over 10 percent in the last six months while the S&P 500 is up 13.5 percent during this time. Both companies have matured and are competing in a hyper-competitive, commoditized industry where profits are hard to come by. When Meg Whitman was named CEO of HP, I was expecting some sort of turn around by the company, but that has not come to fruition until the earnings report for the first earnings report where she was CEO for the entire quarter.

Meg Whitman was one of the driving forces behind eBay's (NASDAQ:EBAY) road to success. Today, it is still one of the best dot com companies out there. Her strategy to improve earnings is to lay off 27,000 employees and make HP a leaner company. As a product of Bain, this isn't a surprise. Strategy consulting is often about finding fat to trim. The only ways to improve profit are to increase revenue or decrease costs. Since both Dell and HP are both expected to struggle with increasing revenues, it leaves management with only one option.

I put a lot of emphasis on leadership when it comes to making stock picks with tech companies. Innovative minds aren't the only requisite. For a tech company to be a good investment, the leader also needs to have profitability and the shareholder in mind. Mark Zuckerberg did a great job of making Facebook (NASDAQ:FB) a successful social networking site, but his lack of interest in revenue generated and his demonstrated indifference towards shareholders, means that his company may not be the best investment right now. Andrew Mason did a good job of creating a company with fast growing revenue, but his team's horrible accounting and inability to turn a profit have driven Groupon (NASDAQ:GRPN) stock way below its IPO price. In the battle of HP and Dell, HP has gone with a proven leader who will make the right cuts while Dell has stayed with Michael Dell, who may have trouble steering a mature company.

Over the next three months, I expect HP's performance to outperform the market and for Dell shares to struggle. My current target price for HP is $28 (up from $23.00) and my target price for Dell is $12 (down from $12.53). I believe the Dell will eventually make a change at the CEO position and bring in someone with strategy consulting experience who will be willing to make some major cuts and give Dell a leaner design that will survive going forward.

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