CEO Calls Trouble as HP Shares Tumble

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

In a week, month, year, and decade where all eyes seem to be on Apple, I'm here to remind you that sometimes it is important to take a step back and look at the competitors. Don't get me wrong; I love Apple. I'm the proud owner of an iPod touch, and I love few things more than a PC vs Mac discussion. However, I am also the proud owner of an HP laptop, and while it seems as though Apple (NASDAQ: AAPL) has taken over the world, let's not forget that (for now) Hewlett-Packard (NYSE: HPQ) is the world's leader in sales of PCs, as well as printers and computer servers. However, HP isn't exactly in the midst of their greatest times. Here's why many are selling HP.

Last Wednesday, HP's chief executive Meg Whitman served as the bearer of bad news, informing a group of Wall Street analysts that HP (not unexpectedly) was struggling. "We have much more work to do," she noted during the conference. She continued to explain that analysts should expect significantly lower revenue and profit figures than expected, and, even worse, she explained that the company should not be expected to right the sinking ship before 2016.

"It will take five to ten years to fully take care of this," said president of Moor Insights and Strategy Patrick Moorhead, one of the attendees of the meeting, "just the way it took IBM to remake itself."

The news sent investors bolting for the exits, as the ticker shot down eight percent during Whitman's talk alone, finishing the day nearly 13 percent down, the lowest it has been in a decade. While Whitman's frankness was refreshing and the news comes mostly unsurprising, it is the gravity of the situation and the fact that the news finally officially hit the stands that seems to have investors running.

Some of the numbers presented by Whitman and analysts that day that caused the panic are:

  • Operating profit margins: previously expected to be about 7 percent; now expected to shrink to (at best) 3 percent, and could possibly completely dissolve
  • Forecasted revenue for next year: expected to be 11-12 percent below 2012 fiscal levels
  • Earnings per share: expected to fall by 16 percent

So with all of these issues, what changes does Whitman plan to make? The executive has started with product development and global marketing as the first steps toward recovery. "Operational excellence," she said, "should have become a way of life." Instead, however, HP has struggled with internal operations. 

The beginning of the product development changes could look something like this:

  1. Decrease the amount of products that HP creates
  2. Evacuate businesses that are in decline; shift towards thriving ones (cloud computing, etc.)
  3. Shift profit focuses from printer inks to printer sales
  4. Develop a printer subscription service with a yearly annual fee
  5. Further layoffs (29,000 have already been announced.)

Whether or not investors will buy into the new HP is still yet to be known. It seems as though it will be a while, if they do, because, as Moorhead says, "Wall Street doesn't like any [rebuilding period] longer than a one- to three-year horizon. It's too much risk for them." Whitman has already stated that a completed rebuild by 2016 is unlikely.

So, what do these changes mean for other competitors, like Lenovo (NASDAQOTH: LNVGY.PK) and Dell (NASDAQ: DELL), the second and third (respectively) in command on terms of PC sales market share? For starters, let's look at the players in the PC market:

Preliminary Worldwide PC Vendor Unit Shipment Estimates for 2011 (Units) 

<table> <tbody> <tr> <td> <p><br /><strong>Company</strong></p> </td> <td> <p><strong>2011 Shipments</strong></p> </td> <td> <p><strong>2011 Market Share (%)</strong></p> </td> <td> <p><strong>2010 Shipments</strong></p> </td> <td> <p><strong>2010 Market Share (%)</strong></p> </td> <td> <p><strong>2011-2010 Growth (%)</strong></p> </td> </tr> <tr> <td> <p>HP</p> </td> <td> <p>60,554,726</p> </td> <td> <p>17.2</p> </td> <td> <p>62,741,274</p> </td> <td> <p>17.9</p> </td> <td> <p>-3.5</p> </td> </tr> <tr> <td> <p>Lenovo</p> </td> <td> <p>45,703,863</p> </td> <td> <p>13.0</p> </td> <td> <p>38,180,444</p> </td> <td> <p>10.9</p> </td> <td> <p>19.7</p> </td> </tr> <tr> <td> <p>Dell</p> </td> <td> <p>42,864,759</p> </td> <td> <p>12.1</p> </td> <td> <p>42,119,272</p> </td> <td> <p>12.0</p> </td> <td> <p>1.8</p> </td> </tr> <tr> <td> <p>Acer Group</p> </td> <td> <p>39,415,381</p> </td> <td> <p>11.2</p> </td> <td> <p>48,758,542</p> </td> <td> <p>13.9</p> </td> <td> <p>-19.2</p> </td> </tr> <tr> <td> <p>ASUS</p> </td> <td> <p>20,768,465</p> </td> <td> <p>5.9</p> </td> <td> <p>18,902,723</p> </td> <td> <p>5.4</p> </td> <td> <p>9.9</p> </td> </tr> <tr> <td> <p>Others</p> </td> <td> <p>143,499,792</p> </td> <td> <p>40.7</p> </td> <td> <p>140,198,078</p> </td> <td> <p>40.0</p> </td> <td> <p>2.4</p> </td> </tr> <tr> <td> <p><strong>Total</strong></p> </td> <td> <p><strong>352,806,984</strong></p> </td> <td> <p><strong>100.0</strong></p> </td> <td> <p><strong>350,900,332</strong></p> </td> <td> <p><strong>100.0</strong></p> </td> <td> <p><strong>0.5</strong></p> </td> </tr> </tbody> </table>


Only time will tell how these competitors will respond to HP's blip. Dell has stated that it would like to narrow its focus more closely on only a few markets, just as HP has said. However, who will come out on top? Lenovo has said that it is considering dropping its tablet project to focus more competitively on laptops. And Apple? Well, the way things are going right now, it doesn't seem like Apple has to worry at all.

The Foolish bottom line

HP has, undeniably, many problems on its hands. Fortunately, they believe that their fourth CEO since 1999 is the right person for the job. The tech giant does lead the industry in revenue. However, with many of their numbers looking the way they do right now, changes are in order, and rightfully so. Are they the right changes? We will see. However, for now, my advice is to steer clear of HP until further notice.

Michael Nolan has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. 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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