Hewlett Packard– A Proud History and an Uncertain Future

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Note: An original version of this article mistakenly stated that Hewlett-Packard acquired Digital Equipment Corporation in 1998. This error has been corrected below.

In the fast-paced world of technology with its unwavering demand for innovation, few companies have survived for as long as Hewlett Packard (NYSE: HPQ). In fact, the Hewlett Packard Company has existed since the late 1930s, and has been a publicly traded entity since 1957. HP is widely considered to be the founding high-tech company of Silicon Valley, with its origins in a Palo Alto garage that still stands today. (The garage was designated as a California State historical landmark in 1986)

A Brief History

The company’s founders, Bill Hewlett and Dave Packard, were both electrical engineers who had graduated from Stanford University in 1935. Early on, the two designed new and innovative products that were cheaper to produce than their competitors and they were successful. The company initially focused on test instruments and calculating devices, but it became apparent that designing “personal computers” and peripherals would be the company’s future. It is no exaggeration to say that HP has witnessed, and been a part of, nearly every advance in computing that has taken place over the past half a century.

The 90s saw HP soar along with the rest of the tech boom companies. In 1999, HP spun off Agilent Technologies and kept only the computing, storage and imaging businesses. The company also acquired its competitor Compaq Computers in 2002, expanding their reach into the data center. When the tech boom went bust however, HP suffered along with the rest. The 2000s saw a roller-coaster ride for the stock, but it never regained the levels seen at the peak.

Comparison

Today, HP competes with IBM (NYSE: IBM) in the data center hardware, networking, and support sector. It also competes with Accenture (NYSE: ACN) in IT services, and with Dell (NASDAQ: DELL) and others in desktop computing. With a current market cap of $24 billion, HP is half the size of Accenture at $50 billion and almost one-tenth the size of IBM at $218 billion.

Revenue growth at HP also lags its closest competitors, and is decelerating. Revenue for the 2013 fiscal year is expected to come in at around $112 billion, down 6.5% from 2012. By comparison, revenue numbers at Accenture are estimated to be up 5% and at IBM, up 2.5% in the same period. The company has also said that earnings growth will be flat to negative, compared to between 10% and 12% for Accenture and IBM.

Risks

HP has recently suffered two consecutive quarters of severe losses due to write-downs from acquisitions made in 2011 and 2012. In the most recent quarter HP posted its largest loss ever, nearly $9 billion, related to its purchase of British software maker Autonomy last year. This is on top of an $8 billion charge to account for the diminished value of Electronic Data Systems which it purchased in 2008. The company has also announced the largest round of job cuts in its history – nearly 30,000 workers from its 350,000 total workforce. The charges from these layoffs will be incurred in the 2013 reporting period.

The newest CEO, Meg Whitman, has committed to reducing HP’s annual expenses by $3 billion in 2013 and beyond. Investors however, worry that cutting too much from the budget might allow competitors to move even further ahead in new product innovation. With a recent share price of just over $12 – a level not seen since the mid-90s – Meg has certainly got her work cut out for her.

Conclusion

Given its long history of thriving in the highly competitive technology realm, one might expect HP to weather these latest hurdles as they have others. The challenge this time however, might be too much to overcome. The combination of economic conditions, an innovation vacuum and a marginally competent board of directors, makes the future look dim. When we add in profits margins and expenses that are at the bottom of its category, HP looks like a company with many years of struggle ahead.


Chizy has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend Accenture Ltd., Dell, and International Business Machines. 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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