Where Will Hewlett-Packard Go From Here?

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

It’s been about a month since Hewlett-Packard (NYSE: HPQ) recorded its FY2012 results along with a write-down of $18 billion to account for losses related to its acquisition of EDS and Autonomy.  I’m hopeful that the dust has settled and think it’s time to take another look at this technology giant. 

I need to point out however, that I am a bit biased. Since I purchased my first LaserJet II in the late 1980’s I’ve been a big fan of Hewlett-Packard.  That machine was a workhorse and was the first in a series of HP products I’ve since purchased.  High quality machinery, parts, and supplies ensure that I remain a fan two decades later.  My firm belief is that this is a company which lost its way for a while with some poorly considered acquisitions and strategic decisions. 

FY2012 Results:

Investors were understandably upset when HP released its FY2012 results on November 20.  After the write-down of EDS to the tune of $9 billion in the third quarter, another write-down in the fourth quarter of another $9 billion related to the purchase of Autonomy was a big surprise.  HP had provided guidance that the integration was not going smoothly, but not that that they would take a complete write-off.  As recently as August, Meg Whitman, HP’s CEO said “Overall we have a very long way to go, but we are taking steps to fix the problem and help Autonomy succeed.” 

It’s important to note though, that in addition to the massive $18 billion write-down, HP reported other bad news for FY2012.  Its core businesses (Personal Systems and Printing Groups) both had lousy results when compared to 2011.  The Personal Systems group reported income down 10% compared to FY2011 and the Printing group was down 6.5%.  Without the goodwill write-down, I estimate that HP’s earnings would have been around $2.73 for fiscal year 2012, still an 18% decline from FY2011 earnings of $3.38 per share. 

Competition:

HP’s competitors in the computer industry have had mixed results.  Trading around $10.50, Dell (NASDAQ: DELL) is near its 52 week low.  I believe this is due to the general downtrend for consumer demand of PC’s.  On the bright side, with a 30% increase in R&D spending from 2011 to 2012, it seems to me that Dell recognizes the need to move into different markets.  I’m looking forward to Dell’s earnings release in February.  Apple (NASDAQ: AAPL) is also in the business of making personal computers; however I think it has a more sensitive finger on the pulse of what consumers want.  With a PEG ratio of only 0.5, this stock appears to be undervalued.

HPQ data by YCharts

Conclusion:

HP is currently trading around $14, up from the 52 week low of $11.35 it reached just after it released earnings in November.   I believe that HP stock will continue to rise and will continue to be a resilient company.  Now that it has taken these write downs, I believe the firm will become stronger.  I am also encouraged that spending in R&D continues to increase.  It was almost 5% higher in FY2012 compared to FY2011.  I like seeing R&D spending going up in a tech company and hope it means that HP is looking to develop new technology closer to the actual desires of consumers.

It seems to me that HP has not made wise decisions in terms of where it invests its cash and, more importantly, where it invests the future of the company.   Further, the company has not appeared to be actively working to incorporate the new acquisitions into the HP “family.” Meg Whitman, long time CEO of eBay joined the HP Board early in 2011, then became its CEO in August 2011.  Ms. Whitman is a visionary leader and I believe she has what it takes to make the hard decisions and successfully bring HP out of the mess it is currently in. I believe that she is taking tough steps now to put the company in a more stable place where the numbers reflect the reality of the company.  She has only had a year in the position and I hope that HP’s Board will give her the latitude to make the necessary changes.

Though analysts are looking for HP to be trading down $1 or around $13 per share a year from now, I believe that the stock will continue to recover from the decline that it has experienced this year.  I would cautiously HOLD this stock until the next quarterly earnings are reported in February.  We’ll take another look at the company then.

 


GailPEddy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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