Tech Giant in the Rough - Poorly Managed Game

Margie 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) - I went long on the stock in the low $20’s as I have family that work in the company. The stock sits around $13 a share today (yuck), so let’s do a SWOT analysis on the company and figure out if we have value or a sinking ship.

Strengths

  • Very strong and trusted brand name
  • Printing: The world leader in the printing business, they invented the original laser printer; they have ridden the invention to steady yearly profits.
  • A long list of assets, including real estate and patents
  • The cloud services division is doing quite well; HP is strong here.
  • Quoting fellow Fool writer, Paul Franke: "You can purchase the company’s income producing assets at 3x EPS and 2x operating cash flow" (more on his column and thoughts below).

Weaknesses

  • Management: Since the original founders left, the company has been steadily driven into the ground. First Carly Fiorna did a mediocre job, then Mark Hurd gutted R&D to boost near term share price (and his own options) and made a wasteful purchase of Palm, which has since been mothballed, and then Leo Apotheker made a horrendous purchase of British software maker Autonomy and is now taking an $8.9 billion charge for it.
  • They brought out the HP tablet with no apps to back it, and then quickly mothballed the project, losing tons of money. Note to management: You only get so many of these duds!
  • No offerings in mobile (huge).
  • Moody’s recently downgraded HP’s long term debt, increasing costs should HP want to borrow. This will also minimize HP’s ability to acquire any new companies (which might be a good thing).
  • That 4.3% dividend will likely drop as HP might have more pressing things to do with the cash currently paid out to shareholders. According  to this column on the Motley Fool, HP sas $11.3 billion in cash versus $28.4 billion in debt, unlike most large tech companies which are nearly debt free.

Opportunities

  • New CEO Meg Whitman did well at eBay and has admitted HP’s problems cannot be solved overnight. She deserves to be given a chance.
  • Should they choose to re-invest in R&D, HP still has a core group of very talented engineers.
  • According to this column at Motley Fool, HP might be interested in buying Research In Motion to give itself mobile offerings. Don’t know if this is good or not, but it's an opportunity.

Threats

  • As we become more and more of a paperless society, we need printers less and less. Just as an example, I went to the bank to transfer money to a friend’s account and a few years ago I would have printed out her directions on a piece of paper to take with me; today I just take my cell phone with me, all the data I need in my palm. The printing business will make less and less money.
  • PC’s: I believe Carly Fiorna spearheaded the purchase of Compaq Computers. Although the PC business had its run, consumers are moving more and more away towards mobile.
  • Apple (NASDAQ: AAPL): HP doesn’t produce Macs, and consumers have been more and more rapidly switching over. Google (NASDAQ: GOOG) has introduced the $199 Chrome Book, which should apply some pressure to the low end of the market.
  • The switch to mobile: HP has mothballed its mobile offerings. Consumers are switching from PC’s to iPads, the Amazon (NASDAQ: AMZN) Kindle, Dell (NASDAQ: DELL) and Google offerings in mass, which should further reduce demand for PC’s.

Takeaway

If you look at HP as a value play, then maybe you have a stock that could rebound and can buy it at the lowest price in over a decade. I therefore refer you again to Mr. Franke’s column and his much more bullish thesis for the stock.

I for one disagree with some of his more bullish assessments in printing and PC's, as they will almost definitely see reduced demand, and as mentioned mentioned above, the PC business is low margin with fierce competition (Dell) and a changing landscape.  

I also state again: The company has been very very poorly managed over the last five or more years, and the stock price is a deserved reflection of that (I say that as a holder of stock that is underwater).

I would be curious to hear from other investors if they have more light to shed on the topic. Please keep all comments respectful and thoughtful.           


margiecfl has positions in HPQ, AAPL, and GOOG. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, Dell, and Google. 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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