Hewlett-Packard: No Steps Forward

by Jeff Reeves | August 22, 2012 5:08 pm

Hewlett-Packard: No Steps Forward

Hewlett-Packard (NYSE:HPQ[1]) dumped its steaming mess on Wall Street after the bell today, and nobody should have been surprised. After all, losses were expected, and this is a company that’s in transition, right? It’s all part of coming out stronger on the other side, right?

Right?

At first blush some investors seem to be buying it, with a few points of movement upwards in HPQ stock after the bell. But color me skeptical on this turnaround that would position the tech giant as an enterprise powerhouse in the years ahead.

First, here are the earnings specifics: HP swung to a loss of $8.9 billion, or $4.49 a share, versus a 93-cent profit in the year-ago period. That’s bad enough. But even worse is that backing out restructuring charges and one-time items, earnings were just $1 a share, compared to $1.10 last year, and revenue shrank to $29.7 billion from $31.2 billion year-over-year.

Analysts were expecting revenue of $30.2 billion, so that’s a decent miss, though the EPS number was pretty much in-line.

Furthermore, HP projected adjusted earnings of $4.05 to $4.07 for fiscal 2012. That’s on the low end of the analysts’ range.

In a release, CEO Meg Whitman said “HP is still in the early stages of a multi-year turnaround, and we’re making decent progress despite the headwinds.” That’s a pleasant way to put it. But the bottom line is that the turnaround fails to acknowledge secular forces — namely a move to mobile and a tooth-and-nail fight for corporate technology dollars in a down market — that could upend any well-meaning scheme Whitman has going.

Case in point: Dell (NASDAQ:DELL[2]) reported ugly earnings yesterday as laptops sales flagged. My article about how Dell and HP are doomed to irrelevancy[3] made the connection between these two companies for a reason: Both are in the same boat, even if HP is seeing a shakeup and Dell remains under the steady hand of founder Michael Dell.

To wit, both can’t sell computers as quickly in a post-PC age.

There’s no secret about that. As I wrote recently in my take on Apple (NASDAQ:AAPL[4]), even the leader in mobile is not immune as new technologies displace the old. Consider that iPad sales are cannibalizing Mac sales[5]. That leaves Dell and HP out in the cold, and related businesses like semiconductor stock Intel (NASDAQ:INTC[6]) are scrambling to find a new way forward. After all, Intel cut its growth forecast[7] recently, thanks to a lack of mobile revenue streams.

All of tech is feeling the pain, so HP’s overtures at corporate restructuring and patience are just distractions for investors. The biggest issue is whether any old-guard tech stock can figure out mobile quick enough to avoid irrelevancy.

Old news, right? After all, HP killed its tablet business last year, so it clearly surrendered on mobile long ago. But how long can a tech company with a struggling PC business and no mobile operations last while trying to prime the pump on its next big thing? The pie-in-the-sky scheme to get bigger in enterprise is no small feat, considering it’s a field already crowded by giants like IBM (NYSE:IBM[8]), Cisco (NASDAQ:CSCO[9]) and others that do it well.

Oh yeah, and businesses are spending less these days. Also not encouraging.

Thus, my money is soundly against Hewlett-Packard. I have been kicking it around for a long time — going as far as to call Hewlett-Packard all that is wrong with Corporate America[10] in 2011, and most recently explaining why the turnaround plan of Meg Whitman & Co. is doomed to fail[11].

I know Whitman may look like a fresh start, but there’s too much damage to undo here. That includes not just a revolving door in the corner office but also serial acquisitions[12] — including 42 buyouts since 2005, the 10 biggest of which alone total $40 billion. That’s more than HPQ’s current market cap of around $37.6 bilion! That’s why it’s at 2005 valuations, down 60% in five years and 25% year-to-date, currently trading under $20 a share.

Maybe HP can figure things out before its PC and printer sales dry up. But I’m not interested in waiting around to find out.

Count me out of this boondoggle. If you’re wise, you won’t buy into the turnaround hype either.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[13] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple but no other stocks named here.

Endnotes:
  1. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  2. DELL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DELL
  3. Dell and HP are doomed to irrelevancy: http://investorplace.com/2012/08/dell-hewlett-packard-continue-slow-death-march-to-irrelevence/
  4. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  5. iPad sales are cannibalizing Mac sales: http://investorplace.com/2012/08/the-bearish-case-for-apple/
  6. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  7. Intel cut its growth forecast: http://investorplace.com/2012/07/intel-is-getting-its-mojo-back-intc-earnings/
  8. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  9. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  10. all that is wrong with Corporate America: http://investorplace.com/2011/08/hewlett-packard-hp-stock-buyback-autonomy-buyout-hpq/
  11. the turnaround plan of Meg Whitman & Co. is doomed to fail: http://investorplace.com/2012/05/hewlett-packard-hpq-latest-turnaround-doomed-to-fail/
  12. serial acquisitions: http://investorplace.com/2012/05/hpq-a-tech-dinosaur-fooling-nobody/
  13. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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