This Company Would Be Better Off At Half Its Size
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“2012 was the first year in a multi-year journey to turn Hewlett-Packard (NYSE: HPQ) around,” according to CEO Meg Whitman. Let me save her and investors a lot of time and tell you the first step to turn the company around, get rid of the PC business. I know that many people who love HP desktop and laptop products might think I'm crazy, but this war has already been lost. I'll go even a step further and suggest that HP also combine this PC business with its printing business and have a two for one sale. I know that this would make HP into a completely different company, but that's the point. HP needs to make major changes, otherwise this turnaround may never occur.
PCs Aren't Dead, But HP Needs To Give Up:
I'm not suggesting the PC industry is dead. I've actually written articles in the past saying just the opposite. However, there is a difference between buying stock in companies that make money no matter who sells the computer (think Microsoft and Seagate) versus being the actual computer manufacturer. Let's face it, PCs have become a commodity. There is very little unique design or innovation in either the desktop or laptop space. What seems to happen is, a company takes a chance with a new or innovative design, Apple (NASDAQ: AAPL) comes to mind, and then everyone copies this idea. Just as an example, Apple comes out with the Macbook Pro weighing about 4.5 pounds and Intel pushes the Ultrabook concept of laptops that are similar to the Macbook line. HP offers a lineup of several Ultrabooks, but each of these laptops weighs within a half a pound of the Macbook. Dell (NASDAQ: DELL) actually offers a more directly competitive lineup of Ultrabooks, with two models weighing in at 3 and 3.3 pounds respectively. I know that some are going to think I'm crazy, but honestly HP needs to give up the fight when it comes to PCs.
Systems Sales Were Terrible:
There was a time when it seemed like HP could do everything. The company was selling a ton of PCs and its server business was going well also. However, at this point there is very little going right for the company. In the last three months, overall revenue was down 7%, and non-GAAP EPS was down 1%. While these numbers alone are certainly not good, the company's results in the Personal Systems division were downright horrible. The company saw revenue down 14%, with Commercial revenue down 13% and consumer revenue down 16%. This is bad enough, but the company also saw unit sales drop by 12%. Since revenue dropped faster than unit sales, this tells us not only are customers buying less HP PCs, but they are also making less on each one sold. Dell also struggled with desktop sales down 8% and laptop sales down 26%. If you look at Apple, the company's 6% increase in Mac sales looks pretty impressive relative to these under performing companies. Whether HP will admit it or not, this division needs to go. What will be equally surprising to some is I think it should be bundled with the company's Printing division.
Printers Are High Margin, But They Need To Go Too:
HP is well known for its printers, and while the ink business is a high-margin business there is a shift in this industry that is already underway. Businesses and individuals are just not using printers in the way they used to. The move toward electronic documents is clear and will only continue. HP Printing revenue was down 5%, but total hardware units were down 20%. While some might think this decline was due to consumer printer sales, the pain came from both sides of the business. Consumer printer unit sales were down 22%, but commercial unit sales declined 15% as well. If HP wants to return value to shareholders, bundling the Personal Systems and Printing units and then spinning off or selling these divisions is the next step. If the company made these moves, it would leave HP management free to focus on the potential future of the organization.
50% Less = A Better HP?
The company's future is with its Services, Software and Enterprise businesses. While there was little strength in these divisions, their results were better than Personal Systems or Printing. In addition, while the PC business is slowly growing, and printing is moving toward obsolescence, these other businesses are showing good organic growth. Current results weren't great, as Services revenue was down 6%, and Enterprise revenue was down 9%. However, the company's networking revenue increased 7% and the Software business was strong. This unit saw license growth of 10%, support revenue grew 9%, and services grew by 48%. These divisions represent about 50% of HP's current revenue, and with this increased focus, HP's turnaround time could be cut in half.
The Financials Are Holding Up, But For How Long?
Hewlett-Packard is doing two things to improve the stock's value for shareholders. First, the company is repurchasing shares and has retired about 2% of its diluted share count in the last year. Second, the company is returning value through dividends. In the most recent quarter, HP produced enough free cash flow to pay its dividend, repurchase $124 million in shares, and still have billions left over. The question investors need to ask themselves is how long can HP continue losing sales and generating sufficient cash flow? I would suggest the longer this turnaround takes, the higher the likelihood of failure.
In the end, it's actually very simple. HP needs to make some hard choices and the sooner the better. The only thing going for HP investors right now is their dividend yield is over 4.4%. However, analysts are calling for virtually no earnings growth in the next few years. By this measure Dell would seem to be a better investment. Dell and HP are facing similar struggles, but Dell is at least expected to grow earnings, and pays a respectable dividend of 3.5%. Dell also has been more successful pushing its Enterprise business. However, if investors want to invest in a leader in the field, Apple seems like the clear choice. With the company's newly minted dividend yield of about 1.8% you won't get the same income level, but analysts expectations of 20%+ EPS growth far surpasses either Dell or HP. Apple also has the advantage of gaining sales in places where Dell and HP are struggling, like smartphones, tablets, and laptop sales. If you believe in the HP turnaround story you need to be willing to be patient, and for every quarter that goes by this turnaround looks less likely. The company would be better off being split in half. This way the PC and Printing division could focus on its business, and the rest of HP would have a chance to compete. The way things are right now, HP is trying to be too many things to too many people, and is failing across the board.
MHenage owns shares of Apple. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and Dell. 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!