I read a fascinating article in The New York Times over the weekend that said fallen Hewlett Packard (NYSE: HPQ) CEO Mark Hurd was “disliked” by the company employees and HP’s board. According to inside sources, Hurd cut the R&D budget, sowed mistrust and was actually destructive to HP in the eyes of some company leaders.
I thought to myself, “If that’s the case, then why panic over the double-digit drop in Hewlett Packard stock since August began? With improved morale alone, the company’s productivity should improve and HP will rebound.” So I took a closer look at the tech giant — and found even more evidence that HPQ stock is undervalued and a great value for investors right now.
Here are my top reasons why Hewlett Packard is a buy below $41.50 after the recent scandal:
Previous HP Success Driven by Many Factors — Though Hurd was indeed named CEO in 2006 at the beginning of a great run for HP, he was by no means the only reason for the company’s success. In fact Cathie Lesjak, the CFO turned interim CEO, is considered one of the best at lean and mean cost cutting and is a big reason Hewlett Packard weathered the recession so well. She was, essentially, the force behind Hurd’s success on the bottom-line and for very respectable margins. Reports like those in the Times about Hurd’s problems with co-workers — coupled with actions like the $20,000 in expenses that led to his firing and a previously settled sexual harassment claim — make it hard to believe he was the sole source of growth and success at Hewlett Packard over the past four years.
Current Sell-Off Exacerbated — Even if Mark Hurd was the elite CEO some believed him to be, the sharp decline in HP stock recently had been caused by far more than just his departure. First, the news came at a time of stocks selling-off in general. As the Nasdaq shed -5% last week, that naturally made things worse. Also, Hurd’s insider sale of over $11 million of HP stock in two transactions — one in November and one in May — scared investors. But I suspect Hurd knew his past relationship was on the verge of being made public and was cashing in his chips before facing the board and a possible dismissal. Lastly, Wall Street and shareholders punished Hewlett Packard stock as a way to vent outrage over the plush $40 million golden parachute Hurd was “rewarded” with as part of him being fired. Notice that none of those things have anything to do with the stock’s fundamentals, future potential or remaining leadership. That tells me the sell-off was overdone.
Future HP Growth Overlooked — Most importantly, absent of any scandal, most rational investors would agree that HPQ stock is on the way up. HP has been buying storage and networking companies that allow it to attract business from clients with more complex IT needs. Also, the company has economies of scale to keep costs down. For three years in a row, HP has been in first place globally for “information technology,” including PCs, printers, computers servers and software. It is the largest tech company in the world by revenue. Lastly and perhaps most importantly, that mammoth revenue is still growing. Analysts are estimating that HP will generate $125 billion in sales this year — up from $115 billion in 2009. That indicates growth on the top-line when many tech companies are only boosting profits by slashing costs. Those fundamentals make Hewelett Packard a great stock, and after the dust from the Mark Hurd fiasco settles, investors will realize that.
Of course, all this is not to say there won’t be rough going in the short term for Hewlett Packard. Investors are wondering whether HPQ stock has a deeper problem behind Hurd’s investigation that could mean very bad things for the company. The fact that a $20,000 expense report misjudgment should topple one of the most effective, shareholder-value creating CEOs of recent years seems a bit odd — and Wall Street is waiting for the other shoe to drop.
But my suspicion is that the $20,000 tab and sexual misconduct claims are just the tip of the iceberg for Hurd, and the most convenient reasons to toss him out the front door. Just because this is the only thing HP’s board publicly pinned on him doesn’t mean it’s the only reason they wanted him gone.
Hewlett Packard’s board in fact found in Hurd’s sexual harassment claim that while he did not violate harassment policy, “Mark demonstrated a profound lack of judgment that seriously undermined his credibility and damaged his effectiveness in leading HP.”
Sounds to me that in some respects, Hewlett-Packard succeeded in spite of Hurd being at the helm. This indicates that the stock will have no trouble bouncing back in the months ahead – especially with strong sales fueling future growth. So in my book, investors should buy HPQ while it’s undervalued — that is, below $41.50.
This price is tight after today’s rebound, but there’s still some wiggle room. And since the negativity may linger both for HP and the broader market, investors should have ample opportunity to buy in on dips for the best entry price and provide the biggest profits.
As of this writing, Hilary Kramer did not own a position in Hewlett-Packard.
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