How to save Hewlett-Packard

CEO Meg Whitman suggested to look at other great turnarounds -- IBM and Starbucks -- for ideas.

By Jim Cramer Aug 22, 2013 9:49AM

thestreet logoWhat do you do if you are Meg Whitman, CEO of Hewlett-Packard (HPQ), now that she's had to hit the reset button on the turn at the huge computer company? How do you stop the bleeding of a company that saw an 8% decline in revenue growth this quarter? How do you turn around sales in 2014, given that in the last four months she's gone from predicting an increase in revenue next year to saying that such an increase would be unlikely?

 

First, here's the good news. Despite some pretty hideous numbers, including PC consumer revenue down a staggering 22% and enterprise revenue off 9%, the bleeding has been stopped. In fact, lost in all of the disappointment is the fact that the cash is building despite a 14% decline in earnings, with cash flow from operations at a healthy $2.7 billion, albeit down 6% from last year. The company knocked off $1.7 billion in debt, which is the sixth consecutive quarterly reduction of over $1 billion dollars.

Still, though, it's daunting, and when I interviewed Meg Whitman last night in preparation for Thursday's sit-down, I struggled to find analogues to what must be done to get revenue rolling again.

 

She suggested I look at two of the greatest turnarounds of all time for help:

  1. The IBM (IBM) turn engineered by Lou Gerstner beginning in 1993; and
  2. The transformation of Starbucks (SBUX) by a returning Howard Schultz in 2008.

They did take a similar path -- fix the balance sheet first, then grow the company.


Admittedly, in Howard's case, the world didn't turn against coffee. He had a rising tide, but the company was looking pretty dour, and the stock had gone from $38 down to $20. It all seems very easy now, but the stock did dip to $7 before its remarkable run to $70.


But IBM, where Gerstner basically saved the company from going belly-up is the more cogent comparison. IBM had fallen from $36 in 1991 down to $10 in 1993 before Gerstner came in, and he had the company growing pretty quickly with the stock rising to $139 six years later. Not only did Gerstner have to arrest the balance sheet decline, something that Howard had to do, too, but he had to reinvent the company -- taking it away from being a Big Iron behemoth and turning it into a software and service company with a hardware tail.

 

That was far more difficult than we realize given that the company was hemorrhaging money, but Gerstner had brought in the late Jerry York, one of the most talented CFOs in the business, and York found ways to cut costs and build cash while Gerstner changed the company's mission entirely.

 

Grass in front of the Hewlett-Packard sign outside the company's headquarters in Palo Alto, Calif. (© Paul Sakuma/AP)And that's where Whitman is right now. She is still stabilizing the balance sheet, however, going for a debt-free company while trying to reinvent the business as a cloud-based storage, intelligent software and security play with a personal computer and printer kicker. The problem is that the industry is moving so quickly to smarter, smaller devices that require very little in cost and tie into inexpensive servers while at the same time the world's growth is outright shrinking when it comes to enterprise and personal computer spending.


I just don't know if it's going too fast to make it so that Hewlett can transcend the riptides. Now, the stock of Hewlett-Packard has had a remarkable run since the time Whitman took the very viability off the table last year. It had touched $11 during the dark days of November before rallying into the close of the year, and it hasn't looked back, running up 78% for 2013, although it did hit $27 a week ago.

 

That move made sense, although it is sobering to consider that all the stock has done is gone back to where she took over the job two years ago. Now the big issue is what turns the thing around.


You would like to think it could be new products, which is something that Whitman mentioned was responsible for the amazing Apple (AAPL) turn, but she quickly dismissed that as analogous given there's really no product in the hopper that is as revolutionary as the iPod, or the iPhone or the iPad. She does have some pretty cool products in the stable, including Moonshot, which is a leading server product that can harness the huge Internet traffic for enterprises trying to keep up with the explosive growth. She does have, believe it or not, Autonomy, which is a smart search software, an unappreciated and fast-growing niche for which the previous CEO simply and foolishly overpaid.


Still, though, there's nothing in the lab that's going to move the needle.


Plus, unlike the old days at Hewlett-Packard, there's not enough best-in-class there. The personal computer is a vicious commodity in which the value, or whatever is left of it, accrues to the disk drive companies, semiconductor companies and Microsoft (MSFT). Lenovo, a very low-cost manufacturer has now taken over as the largest PC maker. That bragging rights crown has been lost. Worse, though, Dell (DELL) is out there slashing prices and depressing earnings, something it might not be able to do as a private company loaded with $13 billion in new debt. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

In fact, the only standout area in this whole company remains printers, where business still declined but units went up -- good news for a business that generated $5 billion in sales this quarter. Also, the software business actually increased 1%, although it only did $982 million in revenue.

 

So, I think with that hand, it is all back to the cost-cutting drawing board, as Whitman waits for a turn in worldwide GDP while searching for acquisitions to get some growth. Is she waiting for Godot? I think it's a little better than that because of the cash generation, but there's nothing in this current stable or in the new-term product flow that can turn around sales in this environment.

 

How about breaking up the company? Whitman said that was looked at before, and nothing's different. She doesn't believe that the sum of the parts is worth more than the whole, and the costs would jump if she tried to do it. Merging? With whom?

 

She could and will continue to buy back stock, enough to offset dilution. Also, the company raised the dividend 10% this year, and the board has room to do it again next year.

 

The simple set of facts, though, is that, unlike Schultz, who was able to turn around the stores to something that beckoned while expanding aggressively overseas, there's not a lot of product that, if turned around, would mean growth, and Hewlett-Packard is already everywhere. The IBM path is the hope, I believe, where Hewlett-Packard can turn into a value-added Internet software and security company that also has a decent printer division and a personal computer business that is outsourced to another company so that they are built dirt cheap and don't eat up capital.

 

Can it be done? Yes, but without some economic growth in the world (something that seems to dim every time we look. Although interest rates and the Fed say otherwise), this isn't a "wait until next year" situation; it's a "wait until 2015" issue, which is when this company will have enough cash to start buying other companies along with the help of some economic tailwinds and not headwinds.

 

In short, Hewlett-Packard needs three things:

  1. new product;
  2. worldwide growth; and
  3. a lot of luck.

And it's the last thing you are banking on if you buy it today. 

 

cramer

 

 

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long AAPL.

 

 

More from TheStreet.com

52Comments
Aug 22, 2013 10:09AM
avatar
HP is experiencing the same loss of earnings as most others as the Arbitrage of the low wage products undercut or in a more pronounced description destroy the present earnings level of American consumers.  You can't get blood out of a turnip and all the pressure to lower wages through the reduction of hours and using illegals is now coming home to roost bigtime.  I wouldn't feel too bad for these Internationals though as most have stockpiled massive amounts of cash to hopefully carry them forward while the middle class is forced into poverty.  Anyone reading my drivel over the last several years knows this was predicted as sure as gravity to happen.  It ain't over yet folks we still have 2/3 of the way to go.  Deflation and compression will continue  forcing profits down and stock prices will follow to reflect this reality in due time. This Free Trade isn't free you know.  Now we get the bill and HP is just one of thousands to face this reality.  No amount of managerial or political BS will hide these effects for much longer.  Oh Senor Bill where are all those good paying jobs you promised would come to America?   JMHO
Aug 22, 2013 10:43AM
avatar
I disagree with Cramer and here's why.  In 1983 I bought an HP15C calculator while in grad school for my MSME degree.  The calculator looks as good and works as good as the day I first opened the box.  In 1990 I bought an HP19B calculator while obtaining my MBA - it too is as good as the day I bought it.  In 1996 I purchased a HP Laserjet black and white printer - still works great!  However, in about 2000, I bought an HP flat bed scanner and it worked fine, until I updated to Windows 7 a few years ago - there were no drivers for the scanner and I called HP and they said there was "nothing they could do" -  I told them "put the donut down and write a driver program"!!!  No action.  Meanwhile I had already purchased an HP "All in One" printer in 2008 for my small business - cost nearly $600.  From day one, this thing has been a big pile of JUNK!!!  The software has never worked properly and the tractor feed for the paper is intermittent and unreliable.  I HATE THIS PRINTER!  I called/wrote HP and they were unresponsive to my concerns. 

I went out and bought an EPSON Workforce 4500 printer for $270 and problem solved!  It is the BEST printer ever and does everything the HP "All in One" MONSTROSITY does not!!!  

HP - Listen up.  Your company used to stand for INNOVATION AND QUALITY.  If you are going to turn it around you must get back to these core values.  You lost me as a customer but I do still have 3 great products (out of 5) that still work as designed.  I guess a 60% quality record is "good enough" for the current management at HP.
Aug 22, 2013 12:21PM
avatar

Fat Cat has one thing in common with his crappy computer....... They both act 15.

 

Well that and Bambi says he needs a new Hard Drive.

Aug 22, 2013 11:18AM
avatar
Wall Street/Fraud Street ! One big ponzi scheme to SCREW the small investors ! Get out before the CRASH ! TAKE YOUR MONEY AND RUN !
Aug 22, 2013 12:11PM
avatar

Heard your box burned up the other night Fatty; You are suppose to drink that Steno, not light it.

Thought you lost the Library card too...Obumpa get you a new one ?

 

And Ms. Bambi moved in with Mr. Brucey on the other end of the bridge ?  Is that true.?

I thought Brucey was gay or something; "Not that there is anything wrong with that."

 

What happened to Senor Aki, and a couple others, they finally off themselves.?

Aug 22, 2013 12:02PM
avatar

A gnat on a donkey's azz.....Now that is funny..

 

Kind of like, a fly on shidt.

Aug 22, 2013 1:06PM
avatar
Chaos and confusion at the Nasdaq, not a new thing, and manipulators using it to their advantage so the Dow and S&P starting to drop....Unreal the things that happen down here...Oh well, the cheating crooks caught another break apparently....More later.
Aug 22, 2013 11:10AM
avatar
We could save America by not sending our children to die in wars to enrich the bechtels and halliburtons of the world. 

Also politicians who make decisions  based on the strategic needs and political goals of a FOREIGN country should be ousted. No dual loyalties should be tolerated.

The oil companies have had hundred of billion dolllars of subsidies by virtue of the US ARMED FORCES.
Aug 22, 2013 10:23AM
avatar
Isn't the main problem-- Meg Whitman?
Aug 22, 2013 11:26AM
avatar

"Many U.S. public pension funds are benefiting from double-digit annual returns in fiscal 2013 that are giving them breathing space to try to implement reforms and fix gaping deficits. A raft of pension reforms since the financial crisis by many U.S. state and local governments have not repaired their pension debt, a factor in the bankruptcies of Detroit, Michigan, and the California cities of Stockton and San Bernardino. A 20 percent gain on the U.S. stock market in the twelve months to June is, however, alleviating acute funding gaps in many areas."

 

Is this article saying that QE has been rigged to replenish pension funds? IF SO, it's TREASON and we need to stop it immediately. That would be Gross Misrepresentation of Intent. Holder... get your team moving on the culprits... screwing the future to fund incompetence is WRONG. Especially since those who were responsible for maintaining those pensions were paid salaries, still are and a LOT richer for insider financial gains.

Aug 22, 2013 11:18AM
avatar

"This Free Trade isn't free you know."

 

NTU... it isn't rocket science to trace iconic brands to their overseas makers and see what else they are making. The fact is, NO business platform here in America has control over what those foreign makers give them as product. A really prime example is all techno-equipment. I use a particular HP printer not because of price, but because the core components aren't standard HP junk. Once I figured it out, I bought extra so I could maintain my integrity level long after that good part models got swapped for the junk alternatives. That IS the course, unfortunately. Buy a pair of Levi's lately? They call that "denim"... nobody who knows denim does. There is a flipside... really good quality doesn't necessarily maintain the platform name on it. HP is destined to go away from self-inflicted suicide. What really matters is the competitor who shifts to quality and sells it affordably.  

Aug 22, 2013 3:55PM
avatar
Look at that smirk on Cramer's face above V V ........  wow what a sucker you were. He's still laughing at you.
Aug 22, 2013 1:37PM
avatar

Updating computer systems is a pain in the rear...

Having worked with C's for several years and having a laptop of the earliest ever made..

(Pretty much, just a passive device)

Different PCs, for performing functions on LANS.

And Personal ones for communications, others for storage work...They were all just a tool to me.

 

When retiring I didn't want one around, almost 2 years later; Bought a nice "built out" Dell system.

Got more involved in managing investments and communicating with friends..

The Dell system lasted about 12 years...I took care of it and performed preventive maintenance.

It finally gave up the ghost and my ISP, was too slow also.

 

Using my Social Security and Food Stamp monies, we moved on up, to the Eastside...

And I only hope this HP system last close to the Dell's years..

It's built out also, doubled the screen sizes (OFEs) even the Laptop has a much larger screen then the old Dell.

I still have trouble understanding the Smart phones and Tablet's, usage factors.

Guess you have to be 25-30 and worry all the time about what's going on in the next booth.? 

Aug 22, 2013 10:24AM
avatar
Does everyone know that today is-- Parting of the Red State Wealth Day? It's the day over-confident deadbeats choking the nation's economy are trumped by normal people pulling OUT of the Federal Reserve funded bubbles and hopefully moving it to safe harbors while the Stock Exchanges crash. I have to laugh at the Unemployment Filings news... fewer people working make fewer unemployment claims. 90 MILLION un and under employed people NOT COUNTED in the figures and THAT figure isn't getting hired, it's getting job blockaded. The government is compromised by the Party of NO from Red States... if we want our America back, attack where they keep their steerage funds. We have NO ECONOMY. We need one.   
Aug 22, 2013 11:01AM
avatar
Btw Cramer - I will be in Philly tomorrow if you want to buy me a drink !!  Pittsburgh is an awesome frickin town so I can't wait to see what Philly has to offer !!
Aug 22, 2013 10:51AM
avatar

HP is on par with Kodac. 

 

today, really not known for anything outstanding. 

Aug 22, 2013 2:35PM
avatar
Cramer is on CNBC and appears to be drunk !!   I swear he only had 3 sips of a PBR !!! 
Aug 22, 2013 12:22PM
avatar

The Case of Ben Bernanke's Replacement as the Fatal Chair of the Fed.

 

In one corner we have-- Yellin: J is a genuine Yes-Woman without an independent thinking process who feels her status as a woman exceeds all needs for actual ability to function in the role. Bette Midler agrees and as Tweeted so it must be Gospel of Kool Aid quality.

In the other corner is- Summers: L has been connected to stupidity like T.A.R.P. continuance and the whole QE thing. He has never been quoted as saying- close the banks and frickin' reconcile them and he hasn't uttered a WORD about 100% of QE going into Wall Street and never coming out as economy or even an inflation buster.

 

The REAL problem here is-- WHO chooses. Yes folks, that's right... it's President PC himself, the guy who thinks Gays and Woman are more important than families and pensioners who also get Social Security are due the vicarious proceeds from QE pumping the markets... at the expense of the rest of the rest of us FOREVER. The guy whose REAL campaign slogan was: Save the Unproductive and Tweet often. Hoops anyone? Anybody else get the feeling we're fully screwed and headed for the end of America as we knew it? Welcome to Alumni America... where paper and buttons are worth far more than free enterprise and fair pay regardless of your race, creed, color, sex, sexual preference, national origin or group affiliation.

Aug 22, 2013 12:20PM
avatar

I think it's fun to joust with Fatty, then every so often he comes up with something that makes sense.

He can be an agreeable guy when given the chance..

Of course he seldom makes use of it,  yuk, yuk.

 

Then on the other hand there is V_L, same boring bullshidt every other day..

Ahhh, a fountain of knowledge that babbles like a brook of shidt.

He thinks he is always right, and you on the other hand..??

Probably just a paid poster.

Aug 22, 2013 10:55AM
avatar
Pretty good recap of an "has been" consumer electronics and IT infrastructure organization that is too big to compete with leaner and meaner Asian competitors.  All enterprises grow to become too large for their pants and then need to lose weight, get bigger pants or split the old ones at the seams. HP is not the only old guard IT enterprise  that needs to go on a diet and get rid of the fat. The y may become another value play fro dividends as long as that lasts.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

112
112 rated 1
270
270 rated 2
444
444 rated 3
693
693 rated 4
637
637 rated 5
692
692 rated 6
615
615 rated 7
498
498 rated 8
265
265 rated 9
126
126 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.