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HP’s Latest Turnaround Is Doomed to Fail — Just Like All the Others

Forget earnings 'beat' and run screaming from Hewlett-Packard

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Hewlett-Packard (NYSE:HPQ) stock was at its lowest levels since 2005 before its afternoon earnings report Wednesday, trading around $21 per share. And with good reason. This disgrace of a tech company continues to make serial acquisitions, hire inept executives and fail at innovation.

About a year ago, I ripped into HP with a piece titled “Hewlett-Packard Embodies What’s Worst in Corporate America.” And since then, the antics of this company have only gotten more disturbing to watch.

The most recent black eyes:

  • Hewlett-Packard’s fiscal second-quarter profit slipped a gut-wrenching 31% (though it did beat forecasts).
  • HP revised down its Q3 estimates on slumping printer demand (no surprise to anyone who has read online customer reviews for HP inkjets). Its range is now 94 to 97 cents a share for earnings, vs. a forecast of $1.02. The company also lowered its EPS guidance for the full 2012 fiscal year to a range of $2.25 to $2.30 from a previous estimate of $3.20.
  • The company plans to cut loose 27,000 employees, or roughly 8% of its work force.

Shares of HP have rallied ridiculously on the news and are set to open Thursday up strongly. Some investors probably are cheered because HP stepped over the low bar for Q2 despite a slump in earnings. Others might be cheering the cost-cutting, which will yield annual savings of about $3.5 billion — despite the fact that Morgan Stanley analyst Katy Huberty recently said that “any restructuring announcement as a positive move, but one that will take several years to sustainably improve margins, EPS and free cash flow.” (The emphasis is mine.)

The bottom line is that HPQ has been flailing for ages, and in the absence of anything to change that narrative, the company is just as doomed as it was before Wednesday’s earnings report.

For a moment, let’s go beyond the knee-jerk Reuters wrap-up of EPS numbers and look at the big picture. To me, the most telling number from HP’s quarterly filing isn’t the earnings or revenue, but the “goodwill.”

HPQassets 300x153 HP’s Latest Turnaround Is Doomed to Fail    Just Like All the Others
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Right now, goodwill and intangible assets on Hewlett-Packard’s balance sheet total almost $54.7 billion. Yes, that’s billion with a “B.” That’s more than HPQ’s market cap!

Here’s the page from HP’s quarterly presentation posted on its investor relations website if you don’t believe me.

For those of you who don’t speak 10-K, “goodwill” is the rough value of intangible assets, such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology. Kind of laughable if you ask many consumers how they feel about the quality of HP printers these days that cost less than a single ink cartridge …

A constant drumbeat of layoffs doesn’t help the image of the company, either.

Hewlett-Packard’s recent job cuts come after a 2008 restructuring that cut loose 24,600 workers to save $1.8 billion. And before that, in the summer of 2005, Hewlett-Packard slashed 14,500 jobs to save $1.9 billion under a previous reorganization.

And forget about the rank-and-file — what about the revolving door of chief executives? The lineup in the past seven years includes Carly Fiorina, who was forced out in 2005; Mark Hurd’s ouster in 2010 amid sexual harassment claims; and Leo Apotheker, who was kicked to the curb after less than a year in 2011. One has to wonder how long Meg Whitman will last.

I suppose you could argue that some of these layoffs and restructuring initiatives have been “necessary” after the serial acquisitions of the past seven years complicated HP operations and its org chart. But that’s like saying it’s “necessary” for a thirty-something to downsize from an oversized McMansion he can’t afford to a one-bedroom apartment. The best move would have been to not overreach in the first place.


Article printed from InvestorPlace Media, http://investorplace.com/2012/05/hewlett-packard-hpq-latest-turnaround-doomed-to-fail/.

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