Are These Tech Giants on the Way Out?
Maxwell 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), the venerable top tier tech company, has certainly seen better days. As the personal computer industry has evolved, it has often seemed that Hewlett-Packard has seemed a half step behind its competitors. The company's fiscal third quarter certainly did nothing to alleviate that “feeling” that something is not quite right at Hewlett-Packard.
To the company's credit, Hewlett-Packard management had warned of the dismal third quarter bottom line in early August. But it was management's indication of lowered expectations going forward that is far more problematic. Does management now have a plan to help restore this original Dow Jones Industrial Average member?
The problems for Hewlett-Packard goes back to its 2008 acquisition of Electronic Data System for over $13 billion. The just concluded third quarter loss contained a number of one-time accounting losses, by far the largest went toward writing down the goodwill on that investment. This drove Hewlett-Packard's third quarter result to a GAAP loss of $8.86 billion, or $4.49 per share. Non-GAAP earnings, not reflecting the accounting adjustments, came to $1.97 billion, or $1.00 per share. This was down from $1.10 per share a year earlier, a quarter in which Hewlett-Packard purchased $4.6 billion of its stock. In the 2012 third quarter, the company repurchased about $400 million in stock. The company had about $9.3 billion in share repurchase authority remaining at the close of the third quarter; who knows when it might actually be used.
Looking forward, the technology products that are “hottest” at this time, such as touch tablets, smart cell phones and cloud computing, are areas that Hewlett-Packard has no leadership. Where it does still lead, printers and more traditional personal computers and laptops, it confronts low margins and unexciting growth prospects. The company's $29.7 billion in revenue in its third quarter does not compare favorably with $30.7 billion in the same quarter of 2010 or the $31.2 billion in the same quarter of 2011. Hewlett-Packard's revenue issues were not isolated to any one product or product line. There was a 10% decline in personal systems sales in the third quarter compared with the same quarter of 2011, a 4% fall in networking sales, and 3% declines in services and printing / imaging. These declines were only partially offset by an 18% increase in software sales.
There is more difficulty probably on the horizon. Not only are most of Hewlett-Packard's business lines fully mature and not likely to grow, there is plenty of additional goodwill on its books to write down, and the next big hit will likely be from its over paying for Autonomy in 2011. That $10.3 billion dollar deal has not lived to anywhere near expectations, and a multi-billion dollar write off is in the cards on that one, too.
Where Hewlett-Packard is today is very much akin to where IBM (NYSE: IBM) was in the 1990's, with a stagnant product line, and with competitors able to move much more quickly than IBM was able to. IBM found itself a Chief Executive with tremendous foresight (Louis Gerstner) who would change the overall culture of the company, allow it to sell off its personal computer business, and make tremendous profits on consulting and servicing its systems. I do not know whether that would make sense for Hewlett-Packard. What I do know is that this is a company in trouble, and continuing to sell printers and computers is just not going to get it done. The company has lost two thirds of its market value since mid-2009, and despite selling for a microscopic price to earnings ratio (based on adjusted earnings), of just over 4, its five year PEG is still 1.55. I do not see much upside here over that five year period, and would rather your investment dollars go elsewhere.
Dell (NASDAQ: DELL) has been on a similar financial trajectory as Hewlett-Packard. And that trajectory is the result of the same issue. Dell makes fine desktops and powerful laptops. But the stylish new generation of tablets is not its forte; neither are high margined phones nor other electronics. Its second quarter revenue, operating income, and income fell by 8%, 21% and 13%, respectively, from the same quarter of last year. Dell's big news this summer has been its $2.4 billion purchase of Quest Software, intended to inject needed breadth into Dell's enterprise software business. This is a wise purchase, as the company's hardware business will likely show continued weakness in the third quarter and beyond.
I generally agree with Jim Cramer on Dell. Speculate if you must. The technology industry is changing, and despite the Quest purchase and a cost cutting program, I do not know if Dell can change fast enough to keep up with it.
In the 1980's and 1990's mainstream computer use shifted from mainframes to personal computers. Some well-regarded companies, such as Burroughs and Digital Equipment, were unable to make that transition. Now, as personal computers gradually give way to handheld and tablet models, similar fates may await the likes of Hewlett-Packard and Dell. I would not invest long in either of these companies.
I see the future of computers, in addition to Apple (AAPL), being the likes of new inexpensive tablets being offered by Google (GOOG) and Amazon (AMZN). The amount of permanent memory, processing speed, along with display and sound quality being offered for $200 is extraordinary. The absence of the likes of Dell and Hewlett-Packard from these types of conversations is indicative of the very problems these companies face. It is all about anticipating demand, and Dell and Hewlett-Packard have failed at that miserably.
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