Consider These Stable Computing Giants, Avoid This One Now

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Investors should stay away from Hewlett-Packard (NYSE: HPQ) because it is too complex to manage, dependent on acquisitions for growth, and enduring deteriorating financial performance. Instead, investors should consider Apple (NASDAQ: AAPL) as a safer bet for somewhat higher valuations. Teradata (NYSE: TDC) or Dell (NASDAQ: DELL) are more stable computing picks which are arguably as cheap as Hewlett-Packard.

Too Big to Manage

Bad things will happen when a company becomes too complex to keep an eye on. Hewlett-Packard’s many business units make it unwieldy and vulnerable to big surprises. Most recently, Hewlett-Packard revealed that it is the victim of over an alleged $5-billion fraud, claiming that it has been misled by its recent acquisition, Autonomy. Meg Whitman, Hewlett-Packard CEO said that Autonomy executives willfully boosted its figures through various accounting tricks making it pay close to $10 billion for the purchase in 2011.

Hewlett-Packard was seeking to strengthen its portfolio of high-value products and services for corporations and government agencies when it acquired Autonomy. This acquisition makes search engines which help companies find vital information stored across computer networks.

Whitman alleged that Autonomy had been booking the sale of computers as software revenue and claiming the cost of making the machines as a marketing expense; as well as booking revenue from long-term contracts up-front instead of overtime. This made Autonomy appear to be more profitable than it actually was. Its software business was also shown to be growing faster than was actually the case. If these allegations are accurate, these would have been deliberate moves to groom it for an over-priced acquisition. Soon after the acquisition, however, Autonomy’s results drastically declined prompting the dismissal of its CEO Mike Lynch. The immediate blow of these revelations was felt as Hewlett-Packard shares hit an all-time low in trading since 2002.

The company has been seeking to reinvent itself with the shrinking sales of PCs and printers, having reported a net loss for the fiscal fourth quarter at around $7 billion. But this is only half the story: the other half is problems with acquisitions. The Autonomy story is only the latest problem to surface. Hewlett-Packard had also made losses amounting to around $9 billion in its third quarter due to a charge for acquisition of Electronic Data Systems although in this case it only faulted results that did not live up to expectations.

In the case of Autonomy, it is not clear who would be blamed since the two executives who should have been held responsible are gone. Leo Apotheker, the former Hewlett-Packard CEO and strategy chief Shane Robinson who approved the deal have since left the company. Besides, Deloitte UK, who carried the audit at the time, refused to comment on the matter citing client confidentiality rules. Whitman however revealed that the company will try to recoup some of the cash it spent on Autonomy through lawsuits. A suit has been filed to the UK's Serious Fraud Office as well as the United States Securities and Exchange Commission. Mike Lynch has however denied these allegations. Lynch said in a statement, "It took 10 years to build Autonomy's industry-leading technology and it is sad to see how it has been mismanaged since its acquisition by HP. The former management team of Autonomy was shocked to see this statement today and flatly rejects these allegations which are false.”

Death by Smartphone

Some investors may argue that if a company is doing well, we should ignore its complexity. I disagree, but this argument is moot for Hewlett-Packard since it has been doing poorly.

Smartphones and tablets are eating most of the sales growth in the laptop and desktop computer market. Of the remaining PC market, Hewlett-Packard has fallen behind Lenovo Group (LNGVF) in terms of market share. Lenovo won 15.7% of sales in the last quarter, just ahead of Hewlett-Packard’s 15.5% according to Gartner’s report.

Why is Lenovo gaining ground? Lenovo has been beating Hewlett-Packard in developing markets. Brent Bracelin, Pacific Crest Securities analyst, said, “It’s a whole new bigger trend coming, not just Lenovo.”

Better Bets

Many firms in the personal computer ecosystem are seriously threatened by the evolution of consumer computing. Stock investors should wait for low valuations before even considering investing in these firms. Hewlett-Packard is cheap, but so are many of its competitors:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> <td> <p><strong>D/E</strong></p> </td> <td> <p><strong>EPS Growth Next 5 Years</strong></p> </td> </tr> <tr> <td> <p>TECD</p> </td> <td> <p>Tech Data</p> </td> <td> <p>9.56</p> </td> <td> <p>0.07</p> </td> <td> <p>0.91</p> </td> <td> <p>0.23</p> </td> <td> <p>7.1%</p> </td> </tr> <tr> <td> <p>HPQ</p> </td> <td> <p>Hewlett-Packard</p> </td> <td> <p>NA</p> </td> <td> <p>0.21</p> </td> <td> <p>1.14</p> </td> <td> <p>1.27</p> </td> <td> <p>2.2%</p> </td> </tr> <tr> <td> <p>DELL</p> </td> <td> <p>Dell</p> </td> <td> <p>6.56</p> </td> <td> <p>0.29</p> </td> <td> <p>1.65</p> </td> <td> <p>0.89</p> </td> <td> <p>5.7%</p> </td> </tr> <tr> <td> <p>IBM</p> </td> <td> <p>IBM</p> </td> <td> <p>13.68</p> </td> <td> <p>2.05</p> </td> <td> <p>9.97</p> </td> <td> <p>1.56</p> </td> <td> <p>9.9%</p> </td> </tr> <tr> <td> <p>AAPL</p> </td> <td> <p>Apple</p> </td> <td> <p>13.25</p> </td> <td> <p>3.52</p> </td> <td> <p>4.65</p> </td> <td> <p>NA</p> </td> <td> <p>19.6%</p> </td> </tr> <tr> <td> <p>TDC</p> </td> <td> <p>Teradata</p> </td> <td> <p>25.2</p> </td> <td> <p>3.87</p> </td> <td> <p>5.36</p> </td> <td> <p>0.15</p> </td> <td> <p>15.3%</p> </td> </tr> </tbody> </table>

Hewlett-Packard stock is cheap based on valuation, but there are other cheap stocks with better prospects. Tech Data trades at better price multiples while avoiding the Autonomy drama. Dell  trades at a price-to-sales ratio that is almost as cheap as Hewlett-Packard’s and it has been able to maintain positive net income over the past year. Both Dell and Tech Data rely less on debt financing than Hewlett-Packard.

Given that Apple is reasonably priced, there really isn’t much incentive to fish around cheaper stocks which are struggling. Given the choice between Apple and Hewlett-Packard at today’s price multiples and analyst expectations for future growth, Apple is a much better pick.

Conclusion

There are better stock investments among computing companies. Apple is reasonably priced and a much better performing company. Better speculative bets can be found with Dell or Tech Data.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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