Surprise! The Hewlett-Packard Turnaround Is for Real

by James Brumley | August 20, 2013 11:41 am

To say the past three years have been miserable for Hewlett-Packard (HPQ[1]) — and its investors — would be an understatement.

The stock fell from a peak of $55 in April 2010 to a low of $12 in November 2012, tablet sales have obliterated PC demand, and the company had to replace its CEO not just once but twice during that time (the second of whom was named by Bloomberg as the “Most Underachieving CEO”[2]).

Given the train wreck, it would be easy to conclude Hewlett-Packard is a stock best left avoided. So why are HPQ shares up more than 80% year-to-date?

Because enough people now realize that HPQ’s next three years are going to be a heck of a lot better than the past three.

That Was Then

It’s amazing how little time and effort it takes to crush a company.

Leo Apotheker was at the helm of Hewlett-Packard for a little less than a year, and during that span the stock lost nearly 40% of its value. Although revenue actually grew during his tenure (September 2010 to September 2011), that year’s growth is largely attributable to the preceding CEO, Mark Hurd. In the fiscal year after Apotheker’s exit, the top line contracted by a little more than 5% … heresy for a computer technology company.

Granted, Apotheker was standing in front of a colossal hurdle. That was when tablet computers were hitting critical mass, stealing the very same personal computer customers that helped put companies like Hewlett-Packard and Dell (DELL[3]) on the map in the first place. Now, Dell and HP were not only competing with other PC makers for a share of a shrinking computer market, but were surprised to simultaneously be up against better competition like the Apple (AAPL[4]) iPad in the then-young tablet race; Hewlett-Packard’s Slate never really had a chance.

Apotheker’s solution: To get out of the personal computer business altogether, after already abandoning its webOS work, and continue to work on enterprise level stuff in an effort to become an IBM clone.

His plan didn’t go over well — with anyone. Ergo, Apotheker was shown the door, and Meg Whitman was ushered in. Her first order of business was to cancel the plans to cancel the PC division. By that time, though, after a few too many gaffes from the company and little confidence in Whitman’s ability to save the sinking ship, investors had mentally shelved the stock.

This Is Now

Not that she gets points for speed, but as it turns out, the Meg Whitman turnaround plan is working … or at least, the market has faith that it will work. The fact that investors have bid shares up to the tune of 90% this year convincingly makes that point.

Surprised? You’re not alone. But the few who’ve actually taken a deep look at what HP’s been working on for the past couple years have not only been impressed, but they see the much-improved marketability of new products and new viability in the overhauled company.

For starters, Hewlett-Packard finally realizes it can leverage its technological depth and relationships to build a few — though not too many — multiple consumer products that meet multiple consumer needs.

That’s part of the reason the original Slate struggled; the one-size-fits-all approach only works if you’re Apple and the device does everything you need it to do. Whitman is just as big a fan of Android as she is of Windows OS, depending on the purpose of the device. Likewise, the company is just as apt to use an ARM (ARMH[5]) chip as it is an Intel (INTC[6]) processor, again, depending on the purpose. In Whitman’s exact words, “Our strategy is about supporting multiple OSes and technology that consumers favor.” In other words, diversity has made its way back into the company’s strategy-planning sessions.

HP also is getting serious about controlling costs and being internally efficient. This effort so far has been broad, ranging from making plans to layoff 27,000 employees by 2014, to cut the number of products it unnecessarily manufactures (Hewlett-Packard had been making as many as 2000 laser printers), to implementing a potent CRM solution, and to going ahead and writing down — to the tune of $8 billion — most of the Electronic Data Systems acquisition from four years earlier, which was dragging down the company’s books each and every quarter.

The proverbial crown jewel for Hewlett-Packard, however, is the new line of so-called “Moonshot” microservers.

Simply put, Moonshot servers are poised to raise the standards for Big Data and cloud computing companies. Some industry experts say the Moonshot 1500 microserver systems only need about one-fourth of the square footage that traditional servers need, and the Moonshot line only consumes about one-tenth of the electricity needed to operate most of the server banks in use today. That’s an amazing leap, and amazing savings for organizations looking to get a handle on server-based overhead costs.

Meg Whitman already has suggested that Apple, among others, is interested in using Moonshot technology[7].

Bottom Line

Just so there’s no misunderstanding, it still will be years before the Whitman turnaround plan gets up to full speed. Whitman acknowledges herself it won’t be until 2016[8] that the full fruits of the recent laboring will be blooming.

As evidence of the significant time needed to complete the turnaround, despite recent product launches and streamlining, sales and profits still are expected to decline again next fiscal year, by 2% and 12%, respectively. However, the company knowingly caused it by shrinking its way to better efficiency. But the proverbial light at the end of the tunnel is showing up now, and that’s good enough for the market to start rewarding HPQ … a notion that few would have entertained just a few months ago.

As tough as it is to step into a stock that has nearly doubled in just a few months, that forward-looking P/E of 7 isn’t a pipe dream. In fact, it leaves plenty of room for more upside, near and far.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. HPQ:
  2. “Most Underachieving CEO”:
  3. DELL:
  4. AAPL:
  5. ARMH:
  6. INTC:
  7. is interested in using Moonshot technology:
  8. it won’t be until 2016:

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