Hewlett Packard released its quarterly earnings yesterday. The reported operating numbers were $1.17/share, beating the consensus estimates by $.04. What we don’t see in this headline number are around $2bln in net charges related to poor management decisions over the past half decade. Specifically, HPQ took goodwill impairment charges of $885mln related to their PALM and WebOS purchase, as well as $788mln in charges to close out inventory and contractual obligations to suppliers. After charges Hewlett Packard reported a measly $.12/share of net profits. Hear is a performance summary of what HPQ reported.
With the recent shake-up in top management at the company, the street was eager to hear forward looking strategy from new CEO, Meg Whitman.
Hewlett Packard will curtail future acquisitions and circle the wagon on its core product offering. The result will be lower acquisition expenditures, higher R&D spending, slower growth but a more stable future. Expect street earnings guidance for FY12 to drop from $4.55/share to $4.00.
As bad as the report was on the bottom line, there are reasons to be optimistic. The street will be watching the performance of the new management team. HPQ must prove it can secure a stable product line, slowly grow their services through intelligent acquisitions and step forward from the poor decisions of the past. If Meg Whitman can execute her plan, I do believe this stock has the potential to rise back above $40/share. Their balance sheet shows $31bln in debt, $8bln in cash and they have proven the ability to throw off over $8bln annually in free cash flow. Growing earnings at 3.5% from a stable base of $4 will allow Hewlett’s multiple to climb.
Let’s hope the write-offs are ending and Hewlett Packard can again move forward. Meg Whitman is attempting to reduce the future uncertainty for her company which would seem to be exactly what the doctor ordered.
Joseph Y. Calhoun
November 22, 2011 at 8:42 pmOne thing to consider is HP’s exposure to Europe (about 1/3 of revenue). A recession there could hit HP harder than a lot of tech companies. That might be one reason they lowered guidance so much. Better to overestimate the impact and beat next quarter than disappoint again.
The stock is cheap no doubt and it is still on the watch list at least. I’m actually tempted to start buying soon. Expectations are very low. Technically, the stock bounced off the 50 day today and is acting quite well in a sloppy market.
John L. Chapman
November 22, 2011 at 10:32 pmDoug thanks for the post and I say, “right on”. I still consider this a good long term play. I think this is a case of Meg Whitman sand-bagging, and lowering expectations — though the cloud in Europe is a legitimate concern. But on the other hand there are reasons to think they can blow past $4 earnings next year and then Meg looks like a genius.
I do not like Meg a whole lot as a manager — indeed a case can be made, based on the record and eBay’s history, that she is over-rated — there is something to be said for being in the right place at the right time (having said that, though, let’s face it, nothing succeeds like success, and Meg pocketed several hundred million along the way…. this is indisputable). Perhaps the more politically correct way to say this is, Meg hit a high note while at eBay, but her timing was good, as there have been problems and underperformance since. So, she would not be my choice to have run this company….there are ten guys at IBM that just got passed over, like Steve Mills, who would have been far better choices.
But I still see this as an undervalued stock IN SPITE OF Meg and Ray Lane. Put it this way: if the stock can get back to a 12 P/E ….still way south of IBM and a bit south of the S&P — you have a $40 stock, as you say. HP ought to be able to do that in the 18 months ahead, with some stability and basic block and tackling. (I assume no big US recession till 2013). The assets inside HP are just too rich; viz., printing “monopoly”, terrific enterprise franchise, strong backlog — and say what you will, the world’s largest PC business. HPQ seems like a good long term bet from here..
Joseph Y. Calhoun
November 22, 2011 at 11:23 pmJohn,
Forward multiple on IBM is about 12 and I don’t think the market will put HP on par with IBM. And while I agree that Whitman is trying to lower the expectations bar, I don’t think HP will get to $4 in 2012. And the estimates are still higher than that by the way so analysts will probably be lowering estimates. Let’s say conservatively, they make $3.60 in ’12 and put a 9 multiple on that (roughly a 25% discount to IBM). Then we’re looking at a $32 stock and the gain is around 21%. That isn’t bad but I think we can find better.
The upside in HP is if Whitman can really turn this thing around. Unfortunately, I still don’t think they have a good vision of what they want HP to be. Right now it’s a PC company losing market share, a printer company in a world printing fewer documents every day and a consulting company that has to compete with IBM not to mention a whole bunch of others. What will they be a decade from now? I don’t think Whitman has a clue and honestly I don’t either.
I don’t want to be too negative; they are doing some good things. Like IBM, they are buying back stock and reducing shares outstanding. That has return on equity rising and that is obviously good for shareholders. But they’ve also added a lot of debt over the last few years to fund those buybacks and make some stupid investments. Shareholders would have been better off if they had just paid out a bigger dividend.
My point is that management matters and matters a lot. I want to know what the long term plan is and right now I don’t see one.
Joseph Y. Calhoun
November 23, 2011 at 6:04 pmMorningstar report on HP:
http://news.morningstar.com/articlenet/article.aspx?id=448112
Key graphs:
“Fourth-quarter results were slightly better than we anticipated on revenue and earnings, but with the new regime in place only eight weeks, it is the 2012 outlook that matters most for investors. Management guided to lower revenue and earnings in fiscal 2012, with non-GAAP earnings expected to be greater than $4.00 per diluted share, a sharp decline from the $4.88 delivered in fiscal 2011. We believe the $4.00 EPS level represents a solid target with little risk of a miss, but also allows for the investments necessary to position HP for subsequent years of EPS growth. No specific revenue guidance was given, as management looks to emphasize profitability over growth.
Despite our enthusiasm for the new strategy, HP faces stiff headwinds in its core operating units, including printing, servers, and services. The printing segment’s operating margin fell to just 12.8%, as sales of high-margin supplies stagnated because of excess inventory that accumulated earlier in the year. HP expects two more quarters of challenging results to work through the issue. Sales of HP’s business-critical servers are now in secular decline (down 23% year over year) after Oracle pulled support for the platform. The decline will have a long tail, but the damage appears to be irreparable. Finally, after a long period of underinvestment, the services segment continues to underperform the industry and is facing a turnaround that will be measured in years. On top of these issues, economic uncertainty in Europe threatens to damp IT investment across the globe.”
Douglas R Terry
November 28, 2011 at 5:08 amCEO Whitman’s plan to circle the wagon and concentrate on core product offerings will limit upside multiple. The market will value HPQ closer to companies with commoditized product offerings such as Dell and Western Digital. Yes, they will have small growth in wrapped services so we may look for P/E rising to 8+, putting a short term target of 32 on the stock given current expectations of FY2012 earnings. Whether they can take a quantum leap in their services segment is a long shot given the lead established by Oracle, IBM, VMware. Products have accounted for 2/3 of the business and services 1/3. A conservative peer comparison of 12 P/E on services and a 7.5 P/E on the products segment would put the overall company around 9. To expect a P/E above 10 may presently be overreaching.
Consensus has it that HP overpaid for their most recent acquisition of Autonomy. We’ll have to watch the top line v the bottom line in upcoming quarters to see if this opinion proves correct.