HP HOLDS GROUNG VS. DELL
HP HOLDS GROUNG VS. DELL
2005-12-20 at 10:14:00 am #13531
HP holds ground vs. Dell; you could call it a win
Hewlett-Packard’s personal computer business should be dead by now, if you had believed what many industry analysts were saying a few years ago, crushed beneath the juggernaut of rival Dell.
But something strange happened on the way to the funeral: Dell stumbled, and HP has improbably moved back on track.
Palo Alto-based HP got to congratulate itself Tuesday during Mark Hurd’s first face-to-face meeting with Wall Street analysts since he took command as chief executive officer on April 1.
“It’s very clear that we’ve made the shift” from straggling also-ran, said Todd Bradley, head of HP’s Personal Systems Group, which is responsible for PCs and hand-held digital devices.
“We’ve taken control of the levers that drive our business,” Bradley added, when his turn came in the middle of a numbing four hours of financial presentations from HP executives gathered in New York.
HP exceeded Wall Street expectations in its most recent quarter, ended Oct. 31. One bright spot was a 9 percent jump in PC sales, with operating profit margins more than doubling to 2.8 percent from 1.2 percent a year earlier.
Back in 2001 and 2002, as then-CEO Carly Fiorina was pushing through an unpopular acquisition of Compaq, the deal looked like an alliance of losers without a credible plan for reversing a tide of red ink in the PC business.
Criticism of the merger centered around concerns that HP was getting deeper into distributing PCs through stores and corporate resellers at a time when Dell’s direct-to-the-customer model was rapidly gaining market share.
HP and Compaq had a combined operating loss of $728 million from PC operations in 2001. That’s now swung to an operating profit of $657 million in the 2005 fiscal year, which ended Oct. 31.
Dell’s growth, meanwhile, has slowed to the point where it only matches the PC industry average, while HP is growing slightly faster than the industry average. And Dell missed its most recent quarterly sales and profit targets.
If the trend continues, HP could eventually win back the crown of global PC market-share leader, a title it lost shortly after the HP-Compaq merger was completed in 2002.
The research firm IDC says Dell now has 18 percent of the world market, with HP at 16 percent. They are the two giants of the PC realm; no other competitor is even half HP’s size.
It’s certainly possible HP’s small gain in momentum is yet another example of perception outracing reality. Dell is solidly profitable, with room to grow, and has bounced back from previous soft spots.
What’s more, PCs remain a tough business. HP’s profit margin of 2.8 percent is well below the 4 percent return on U.S. Treasury bills — so investors could be better off with bonds than PC builders.
But the stock market has already decided to run with the Hurd.
HP’s stock price is up an impressive 47 percent since March 28, the day before Hurd was named CEO. The stock closed Tuesday at $29.07.
To look at it another way: Hurd has created $26.5 billion in market value for HP shareholders. Not bad for eight months work.
|Dell’s stock, in the same period, has dropped 14 percent as the Round Rock, Texas, company has continued to fall short of its own ambitious growth projections.
HP turned around its floundering PC business by learning, painfully and slowly, how to do several things at once.
HP now actively sells competitively priced PCs directly through its own Web site, without alienating retailers and resellers. Dell only sells direct, which makes life simpler, but it lacks retail and reseller partners to help move more inventory.
Retailers are giving HP a big boost by subsidizing PC prices as a way of building customer traffic with the aim of selling them more profitable items such as accessories and extended warranties.
“It’s clear that HP has become more price competitive,” says Matt Sargent of the research firm Current Analysis in San Diego. “It’s also evident that HP is winning or at least performing better than expected against Dell in the consumer space.”
Dell, meanwhile, has lost its reputation for industry-leading quality and customer service, apparently because of relentless pressure to reduce costs.
PC World, in its annual survey on customer service in the Jan. 2006 issue, says, “Dell’s halo is fading. Once known for its excellent reliability and service, Dell received scores for desktops and notebooks that were average overall and below average in some areas.”
Average isn’t good enough for Dell, at least not good enough to sustain a stock price based on promises of world-beating performance.
HP, in contrast, is now reaping the benefits of diminished expectations. Just standing its ground against Dell is looking more and more like a victory.