Competition Strangling HP
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hewlett-Packard’s (NYSE: HPQ) situation keeps getting worse and worse. Earlier this month, HP announced that it would write down its services business by $8 billion, devaluing the business that provided $36 billion of the firm’s $127 billion 2011 revenue.
How could this happen? Let’s take a step back.
In 2008 HP spent $13.9 billion to acquire Electronic Data Systems, a technology and outsourcing company. The original logic of the purchase was sound – HP wanted to smooth out its earnings by focusing on a services business that would help the volatile swings of the PC business. Also, HP wanted to compete with IBM (NYSE: IBM) head-on. So far no good.
IBM kept its grip on the service business, and EDS did not live up to its earnings expectations. HP’s business model forced customers to sign expensive, long-term contracts, which would disable customers from jumping ship to more innovative companies. HP originally did well as it trimmed costs in the unit to boost profits, but later it could not compete with firms like IBM or smaller, more agile companies in India.
Also, HP faced mounting pressure from Salesforce (NYSE: CRM), which has been exploding in growth. Salesforce’s FinancialForce.com, which doubled in the first half of 2012, stole away customers by offering accounting and finance solutions using cloud computing, a method that stores customer data on its own servers. Salesforce has been incredibly successful cross-selling this service along with its flagship product – its Customer Relationship Management software.
And to make matters worse, HP and Oracle (NASDAQ: ORCL) are in a bitter feud. Oracle and HP used to work closely together when the firms shared 100,000 customers and Oracle made database software for HP’s computer systems. But Oracle’s 2009 acquisition of Sun Microsystems pitted the two firms head-to-head. As a result, Oracle has ceased to make its database software compatible with HP’s servers, which use Itanium technology from Intel (NASDAQ: INTC). Oracle executives say that Itanium is at the end of its life, but HP is still paying Intel hundreds of millions to continue developing the platform.
The feud will not end well. With all of the skepticism about Itanium servers, customers will not want to buy the products, forcing HP to think of a new solution. Even since the battle with Oracle started, HP has sold less Itanium servers.
All of these problems have spelled disaster for HP, who just reported losing $2.81 per share last quarter. HP posted a profit margin of -4.54% on operating margins of 7.46%.
Also, the company holds just $9.51 billion in cash compared to $29.74 billion in total debt. If HP’s businesses continue to slump, HP’s debt load could weigh the company down, especially if analysts downgrade the debt.
But despite all of the negatives, there are a few upsides that make HP stock very, very attractive if CEO Meg Whitman can turn the company around:
- The stock is battered – it reached a 52-week high of $30.00 in February, compared to a 52-week low around the $17.20 area now
- Revenue per share of $61.88
- Total cash per share of $4.82 – more than 25% of its stock price
- Book value per share of $20.87
- Forward price to earnings of just 4.07
- 3.00% dividend yield
- The company is following the model that BP did during the oil spill – take all your charges at once so you can quickly resume profitability
Despite the competition tying a noose around struggling HP’s neck, HP is resilient. The company has been facing competition from all sides, but HP has enough cash on hand and a strong enough PC business to withstand the pressure. Look for the company to continue its growth after it places this $8 billion charge behind it.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines, Intel, and Oracle and has the following options: short JAN 2013 $150.00 calls on Salesforce.com and long JAN 2013 $150.00 puts on Salesforce.com. Motley Fool newsletter services recommend Intel and Salesforce.com. 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.If you have questions about this post or the Fool’s blog network, click here for information.