Changing Gears Will Help This Dow Tech Giant

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

I often review the portfolios of mutual funds that I think have good management teams. It gives me a sense of what other smart people are looking at. I recently perused the portfolio of Dodge & Cox Stock Fund (DODGX), a dyed in the wool value fund. I found three names of interest to me on the list, you can read the full article here, but one technology name that stood out was Hewlett-Packard (NYSE: HPQ).

When something like this catches my eye, I usually do a strengths, weaknesses, opportunities, and threats (SWOT) analysis to get a more rounded picture of the company I'm interested in. A SWOT isn't that hard, it just requires a critical review of the above metrics. Note that strengths and weaknesses are internal factors and opportunities and threats are external. Here's what I came up with for Hewlett Packard:

Strengths (Internal)

  • Large and diverse industry participant.
  • Solid reputation in the industry, though not as vaunted as some competitors.
  • Financially strong.
  • Shift toward services model.

Weaknesses (Internal)

  • History of operating/management shortfalls.
  • Started shift toward services later than key competitors.
  • Material legacy business in commodity hardware.

Opportunities (External)

  • Cloud computing.
  • Technology increasingly complex, often outsourced.
  • Growth in emerging markets.

Threats (External)

  • Intensely competitive industry.
  • Industry subject to fast changing dynamics and technology.
  • Low barriers to entry in services space.

A Closer Look at HP
HP is a Dow-30 component and one of the world's largest technology companies. It began life as a partnership between legendary co-founders William Hewlett and David Packard. The company has gone through many changes in its lifetime, often driven by technology advances. Today, most would think of HP as a personal computer and printer company, even though it does much more.

The company has created some of its own problems of late, including a poorly handled debacle around the indiscretions of a former CEO. However, the recent addition of Meg Whitman, who achieved success leading eBay, as CEO is a plus and is likely to lend stability to the company and this position.

All The Cool Kids Are Doing It
The bigger issue, however, is the company's move toward the services space. The shift makes sense on many levels and follows on the heels of industry leader IBM (NYSE: IBM). The fellow Dow-30 component moved aggressively toward a service model and away from commodity personal computers a few years ago when it sold its laptop business. While it still builds computer hardware, services have been the growth focus. This is appealing because services generally create annuity like revenue streams based on the contractual nature of the business.

The problem for HP is that it simply hasn't executed as well as IBM, including two rescinded announcements that it would jettison some of its own commodity businesses. Moreover, its shift toward a services model via acquisition and internal growth has been a struggle to say the least because of relatively poor execution. The move is, potentially, a bit late in the game since IBM is already in the space and so, too, are other major competitors.

However, it's important to remember that HP is a financially strong company that has the ability to see this change through to completion, even if it takes longer, and is a bit messier, than hoped. With a near 4% yield, this value priced tech giant is probably worth a closer look for more aggressive investors. Investors looking for a tech bellwether with a stronger position should stick to IBM, noting that IBM comes with a much higher price tag.

Yours,

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ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend International Business Machines. 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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