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

by Jeff Reeves | May 24, 2012 7:00 am

Hewlett-Packard (NYSE:HPQ[1]) 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.”[2] And since then, the antics of this company have only gotten more disturbing to watch.

The most recent black eyes:

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[4] 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.”

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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[5] 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[6] to save $1.8 billion. And before that, in the summer of 2005, Hewlett-Packard slashed 14,500 jobs[7] 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[8] in 2010 amid sexual harassment claims; and Leo Apotheker[9], 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.

Consider that since 2005, Hewlett-Packard has acquired 42 companies. The price tag is difficult to calculate because of all the small companies and private businesses HP gobbled up, but consider this: The 10 largest of that group — including the 2008 deal to buy Electronic Data Systems for $13.9 billion and the 2011 deal to purchase Autonomy for $11 billion — totals roughly $40 billion.

HPQ’s expected market cap for Thursday morning: About $46 billion. Gotta wonder where the “value” from all those deals has come from.

And here’s where I come full circle back to that $54.7 billion in “goodwill.” Goodwill frequently is inflated when one company buys another for a premium over book value. Consider the ill-advised Palm acquisition for $1.2 billion. Total assets at the time were around $1 billion, so HP paid $200 million more. And when you take into account some $1 billion in liabilities at the time of the buyout, including $390 million in debt, you can understand why someone in accounting wanted to play up the intangible benefits of Palm so much.

In short, because the tangible benefits left much to be desired.

The problem is that, eventually, intangibles must become tangible or investors are going to get cranky. And if they don’t, the company needs to ‘fess up and quit deluding itself into all the “valuable” products it has gathering dust on the shelves.

That’s why in the fourth quarter, HP was forced to write off a record $3.3 billion — because its big-time acquisition of Palm was a big-time failure.

How in the hell will HP ever unwind those serial acquisitions? Simple: It can deny and deny, but eventually it will have to write off the “value” of those moves.

I wonder if, when HPQ files its Form 10-Q in the next few weeks, there will be another write-off of substantial size, too.

The bottom line is that perpetual restructurings and cumbersome acquisitions have been the order of the day at HP for ages, and there is little hope of that narrative changing anytime soon. Any investor buying after this earnings “beat” needs to sober up.

I mean, come on: What in the world does HPQ stock offer you? If you want consumer tech, HP has killed its mobile line — so pick the tablet leader in Apple (NASDAQ:AAPL[10]). If you want enterprise, pick red-hot IBM (NYSE:IBM[11]), which has stable leadership and is up 80% in the past five years and up 17% in the past 12 months. If you just want to dabble in the tech sector, pick a broad-based ETF like the iShares Dow Jones US Technology ETF (NYSE:IYW[12]).

Hewlett-Packard simply has nothing to offer beyond the hollow hopes of a turnaround. After all, this company has been turning around for years — why make progress now?

Seriously, drop me a line and explain to me why anyone would want to own this stock. Comment in the section below this article or send me an e-mail at editor@investorplace.com[13].

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[14] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.

  1. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  2. “Hewlett-Packard Embodies What’s Worst in Corporate America.”: https://investorplace.com/2011/08/hewlett-packard-hp-stock-buyback-autonomy-buyout-hpq/
  3. fiscal second-quarter profit slipped: http://www.bloomberg.com/news/2012-05-23/hp-third-quarter-forecast-misses-estimate-27-000-jobs-to-be-cut.html
  4. Katy Huberty recently said: http://www.zdnet.com/blog/btl/hps-big-layoffs-will-only-go-so-far/77303
  5. investor relations: http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-irhome
  6. cut loose 24,600 workers: http://www.hp.com/hpinfo/newsroom/press/2008/080915a.html
  7. slashed 14,500 jobs: http://www.hp.com/hpinfo/newsroom/press/2005/050719a.html
  8. Mark Hurd’s ouster: https://investorplace.com/2011/12/hewlett-packard-mark-hurd-letter-jodie-fisher/
  9. Leo Apotheker: https://investorplace.com/2011/12/meg-whitman-hewlett-packard-ceo-hpq-ebay/
  10. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  11. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  12. IYW: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYW
  13. editor@investorplace.com: mailto:editor@investorplace.com
  14. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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