Hewlett-Packard still dead money

The No. 1 PC maker is testing investors' patience while its CEO overhauls operations.

By Benzinga Aug 23, 2012 3:15PM
By Gordon Wilcox

Another disappointing earnings report has come and gone for Dow component Hewlett-Packard (HPQ), reminding investors that as talented as CEO Meg Whitman may be, she faces an uphill battle in restoring the company's lost luster.

At its nadir, the stock was down nearly 5% in Wednesday's after-hours session after the company said its fiscal third-quarter profit fell 9% to $2 billion, or $1 per share. Revenue slid 5% to $29.7 billion. Analysts expected a profit of 98 cents per share on sales of $30.1 billion. The problem was not the results; it was the outlook.

HP, the world's largest maker of personal computers, cut is full-year profit guidance by 3 cents to $4.05 to $4.07 per share. Analysts expected $4.08 a share. Contending with another disappointment, Whitman was able to find some words in an effort to rally the troops -- the troops being wary shareholders.

"HP is still in the early stages of a multi-year turnaround, and we're making decent progress despite the headwinds," said Whitman in a statement. "During the quarter we took important steps to focus on strategic priorities, manage costs, drive needed organizational change, and improve the balance sheet. We continue to deliver on what we say we will do."

Investors were skeptical, driving down HP shares nearly 8% to $17.72 Thursday afternoon.

The road to rejuvenation for HP shares is littered with obstacles.

Not necessarily a value stock

As many investors know, there is a difference between a value stock and a value trap. A value stock gives investors one or multiple compelling reasons to purchase the shares. Since HP is by no means a growth stock, it needs to have at least a good long-term track record of steady share price increases. That is simply not the case.

Over the past five years, shares of HP have plunged 59.3%. Over that same time, bitter rival Oracle (ORCL) has added 58.6% and fellow Dow component IBM (IBM) has surged 75.1%. Microsoft's (MSFT) 6.4% gain may not sound like much over five years, but it is far better than what HP has done.

Investors who do not like stock-picking could have avoided the HP disaster while gaining almost 19% with the Technology Select Sector SPDR (XLK).

To its credit, HP's dividend has risen by 65% since early 2011, and with Thursday's stock price drop its yield is around 2.75%. However, HP has a long way to go to be considered a dividend stock. IBM is a serial dividend raiser. It feels like IBM raises its dividend like clockwork every year. Other old line tech companies such as Microsoft and Intel (INTC) are going down a similar path.

HP is not IBM or Microsoft. HP's 2011 dividend increase was its first since 1998. Simply put, HP's dividend track record does not make it a "dividend stock." Rather, it is just a stock that pays a dividend.

Cut, cut, cut

Another major obstacle that Whitman faces is that Wall Street and HP investors loved former CEO Mark Hurd. He departed the company under the most dubious of circumstances, but the stock performed well during his tenure.

One reason for that was Hurd never shied away from job cuts. From the time Hurd announced 14,500 layoffs in July 2005 to his last day at the company, HP shares gained almost 86%.

Whitman appears to be hoping for a sequel. In the previous quarter, 27,000 job reductions were announced. The company expects to save $3 billion to $3.5 billion by the end of 2014 as a result. Assuming $3.5 billion in savings, that is nearly 11% of HP's closing market capitalization on Wednesday.

The problem is workforce reductions only help on the bottom line, but it is top-line growth that HP so desperately needs to restore investors' faith in the company and the stock. Rivals are eating HP's lunch and no amount of job cuts will change that.

More from Benzinga

Aug 23, 2012 7:11PM
Never buy antyhing from Hp  until they restore all the american jobs and cut all of the overseas jobs.  buy only from american plants...
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