10 Reasons to Short Hewlett-Packard

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a continuing saga of negative news, bad acquisitions, and extreme losses, Hewlett-Packard (NYSE: HPQ) stock has thrown investors another curveball. 

Last quarter H-P announced an $8 billion write-down of its services business, a huge blow to the group that provided $36 billion of 2011’s $127 billion of revenue.  The company acquired technology and outsourcing firm Electronic Data Systems in 2008 for $13.8 billion, to provide a steady stream of income and to compete with IBM’s (NYSE: IBM) services division.

However, the new acquisition did not meet expectations, and IBM’s services group, which includes businesses like Enterprise Content Management, Business Analytics, and Information Management Services, stole profits away from the company.  Moreover, IBM benefited from a gap in H-P’s sales structure; H-P’s model asked clients to sign expensive, long-term contracts, giving IBM an opening to steal away customers.

Apparently, the write-down and intensified competition with IBM was just a starting point on the downhill slope for H-P.  If you enjoy a good short sale opportunity, here are 10 reasons that H-P may be a candidate for you to consider.

10 Reasons to Short H-P

  1. Low-priced Asian PC rivals are squeezing H-P’s hardware margins.
  2. Consumers are using computers to store pictures instead of printing photos.  This change means that customers use less “high-margin” ink and instead view their photos on Facebook or photo viewing software.
  3. Apple’s (NASDAQ: AAPL) iPad growth is aggressively stealing market share from H-P.  In 2010, Apple sold 7,458,000 iPad units.  In 2011, however, Apple moved an astounding 32,394,000 units, representing a 334% boost.  These sales brought Apple’s total revenue from “iPad and related products and services” to $20.36 billion, approximately 19% of Apple’s overall revenue, according to Apple’s 2011 Annual Report.  As the iPad continues to gain traction, consumers will likely delay the purchase of new PCs in favor of Apple’s new inventions.
  4. Bad acquisitions: H-P overpaid for EDS and for Autonomy, whose business enterprise software business is slipping.
  5. H-P’s longtime software partner Microsoft (NASDAQ: MSFT) has launched its Surface tablet.  Microsoft has yet to begin selling its new tablet, but the software-maker will likely push sales of its own tablet in the stead of H-P’s machines.  One positive for H-P, however, is that Microsoft is still in the process of adding distribution channels.  Without strong channels like Wal-Mart or Target, users will have a hard time spending hundreds of dollars on a device that they have not physically used.
  6. H-P expects revenue “run-off” from four of its major services customers, including General Motors.  GM plans to manage its technology in-house to boost efficiency.
  7. H-P is burdened by $20 billion in net debt, and the company’s slowing businesses have depressed cash flow.
  8. The high debt burden makes it difficult for H-P to acquire smaller firms for their technology, improving the odds that competitors will outdistance the company.
  9. Meg Whitman, H-P’s CEO, expects the company to earn approximately $3.50 per share in fiscal 2013, a greatly reduced number.  If you toss in restructuring charges and acquisition-related amortization, both real possibilities, the true earnings number could touch as low as $2.30 per share.
  10. The feud with Oracle (NYSE: ORCL) is still white hot.  Oracle used to make software for H-P’s computers, but that changed when Oracle bought Sun Microsystems in 2009.  Since then, Oracle stopped making its database software compatible with H-P’s servers.  Moreover, Oracle has gone so far as to discredit H-P’s platform, which is made from Itanium technology.  H-P is still pouring hundreds of millions into the platform, but Oracle has worked to discredit the technology, severely hurting H-P’s sales.

A Return to Profitability

What is H-P to do to reverse its ghastly situation?  Here are four suggestions that could help to turn around the shrinking tech giant.

  1. Use free cash flow to shrink the $20 billion in net debt.
  2. Spin-off H-P’s slowest businesses to raise cash.
  3. Acquire new technology – at a fair market value – to keep current with competition.
  4. Consider trimming the company’s 3.6% dividend in order to trim debt and to buy newest technologies.

If H-P hopes to turn around its history of bad acquisitions and depressing losses, it must act quickly.  The stock has already lost over half of its value in the last 52-week period, and an additional bout of bad news could render yet another major wave of selling.  In short, if investors are thrown another curveball, they may simply give up and walk away from the plate.

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ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, International Business Machines, Microsoft, and Oracle. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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