Trading Hewlett-Packard’s Woes

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

Hewlett-Packard (NYSE: HPQ) recently hit new 52-week lows after CEO Meg Whitman clearly stated that the PC maker will continue to face financial challenges until 2016. While the news is simply a reiteration of information that has been previously shared, it sparked another selloff in the stock which dropped it to multi-year lows. When considered against the backdrop of the perceived pending death of the PC, it may be hard for investors to find a reason to take a chance on the stock. As a Dow Jones Industrial Average (DJIA) stock, the company is supposed be indicative of the state of the industrial economy and of the broader market. With such a murky outlook, some have begun to wonder if the name will be booted from the Dow in the near-term.

Whitman on the Hotseat

The company recently held its Analyst Day at which company executives tried to put a rosy spin on a stark reality. Ms. Whitman admits that the company is very early in a turnaround process that will take several years at best. In response to the underlying message of the meeting, the company has experienced a rash of downgrades. Richard Kugele, an analyst at Needham & Co.  said, “We cannot expect investors to hang on for a possible turnaround four to five years from now, nor do we recommend that they do so.” Mr. Kugele reiterated his underperform rating as the stock fell to its lowest level since 2002.

During the event, Ms. Whitman further admitted that as much as 70% of the company’s assets are in a state of decline, meaning that reinvigorating the company is likely to prove a truly daunting task. Even more so than for competitor Dell (NASDAQ: DELL), HP will need to remain disciplined and hope for a spark to reverse its slide. Dell is also trading at multi-year lows, but has not experienced the same cataclysmic decline that HP seems unable to stop.

The State of the PC Market

The rise of the smartphone and, to an even greater extent, the tablet has led to widespread speculation as to when, not if, the days of the PC will end. As I have addressed in various other writings, I believe this is a gross mischaracterization of the situation. When the issue is considered from a more balanced perspective, it may be seen as a long-term positive for consumers and companies. As things stand, no matter how one spins the situation, a tablet is not a replacement for a PC to accomplish productive tasks.

Later this month, when Microsoft (NASDAQ: MSFT) introduces both Windows 8 and its own tablet, the Microsoft Surface, the transition to a new era of tablets is likely to begin. The new device will include the ability to run a near-full version of Microsoft Office. This may represent the first “hybrid” tablet-PC, but HP and Dell are already preparing to release their own versions that will compete with the Surface. If this shift ushers in a new generation of tablets that function as PC replacements, HP and Dell should benefit, as will Microsoft and Intel (NASDAQ: INTC). Microsoft’s foray into device manufacturing may or may not be successful, but in either case, Intel chips are expected to be used. This should prove to be a significant source of growth for each of these companies.

The Trade

At current levels, HP presents a mixed picture. On the one hand, the fact that the stock is trading at long-term lows may present an attractive buying opportunity, particularly if you are looking to establish a lasting position. Conversely, the company remains early in a multi-year restructuring; it may be several years until the company even expects to see things improve. Given these competing factors, HP is squarely in the speculative arena. Even as a speculative play, you may wish to see extended stabilization before putting any capital at risk.

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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Microsoft. Motley Fool newsletter services recommend Intel. 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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