Hewlett-Packard Company (HPQ) stock, although trading somewhat higher early Wednesday, saw both sales and profits fell in the fiscal fourth quarter. While the 2.7% profit decline wasn’t ideal, it was in line with analyst expectations. Wall Street also expected HPQ revenue to slip, just not quite as markedly as it did.
With revenue falling in nearly every business segment, Hewlett-Packard escaped the quarter with a mere 2.5% sales decline. The slump sounds modest, but given it’s HP’s 12th sales decline in the past 13 quarters, it’s reason for concern.
While HPQ stock has performed very well of late — shares are up more than 35% this year, essentially tripling the performance of the S&P 500 — Hewlett-Packard is set to split into two companies, and on that note, today’s results aren’t quite the dose of encouragement investors were looking for.
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What Does This Mean for the HPQ Stock Split?
In October, investors learned that HP was splitting into two companies: one its PC and printer business and the other its enterprise and services segment. Current CEO Meg Whitman will remain as CEO of the enterprise segment while becoming the chair of the PC/printer business when the split materializes next year.
The idea behind the HPQ split in the first place, as InvestorPlace‘s James Brumley reminds us, was to separate two wildly different business segments in an aim to unlock their full value. In theory it makes each business more efficient and specialized:
The key is focus. Dissimilar business units can — and often do — lead to internal company conflict as each unit battles for the most of the company’s attention and resources. That battle can be so distracting that none of the organization can truly thrive.
Brumley lauded the news of the impending HPQ stock split, reminding readers that the decision by International Business Machines Corp. (IBM) to divest itself of its PC and printer businesses — the former it sold to Lenovo Group Limited (ADR) (LNVGY) while Lexmark International Inc (LXK) was split off — hasn’t exactly sent IBM investors to the poorhouse.
I’ll agree that IBM’s decision to spin off its PC and printer businesses is directly analogous to HP’s power play. IBM hoped to rid itself of the noise and focus on enterprise, IT, and services with the move because it saw those as the future engines of its growth.
There’s just one problem with that.
HPQ Stock: ‘I’ve Always Said That Turnarounds Aren’t Linear’
Those are words spoken by HP CEO Meg Whitman on yesterday’s conference call. They are not at all reassuring words for HPQ investors hoping to gain a glimpse of the explosive growth just waiting to be unleashed in the looming split.
That’s because there was no growth from the enterprise division in the fourth quarter. The enterprise group segment saw sales fall 4% while enterprise services revenue fell 7%. And guess what segment boasted the best performance? The “personal systems” segment — you know, the old ball-and-chain preventing HP from entering hypergrowth mode.
Listen, I don’t think HPQ stock is doomed. I think its wise to follow in IBM’s footsteps and try to get the most out of two distinct business units. But I worry, folks. Because if management bets on one business segment to significantly outperform the other and then the reverse happens, either it’s a fluke, a failure, or executives don’t know the company well enough.
For the sake of Hewlett-Packard and its stockholders, let’s hope its a fluke.
As of this writing John Divine held no positions in any of the aforementioned stocks. You can follow him on Twitter @divinebizkid or on StockTwits at StockTwits.com/divinebizkid.
