HP’s CEO YEAR 1 ,KICKS BUTT :YEAR 2…?
HP’s CEO YEAR 1 ,KICKS BUTT :YEAR 2…?
2006-04-03 at 1:24:00 pm #15248
HP’s Hurd: year 1, kick butt; year 2…?
HP investors are happy about CEO Mark Hurd’s first anniversary — but wondering if he can keep the gains coming.
YORK – Shareholders of Hewlett-Packard are celebrating a happy
anniversary — the company’s stock has risen 50 percent since Mark Hurd
stepped in as CEO on April 1, 2005. But his hardest job — boosting
revenue at the tech behemoth — is still to come.Since taking over from
ousted CEO Carly Fiorina, Hurd has trimmed fat and boosted
profitability at the No. 2 computer maker, which had fallen on hard
times after the Internet bust and its disastrous Compaq merger.
say that in sharp contrast to the flashy Fiorina, Hurd is a no-nonsense
manager who has brought focus and discipline to HP (up $0.33 to $32.90,
Research). Investors say he’s a talented cost-cutter who has excelled
in accomplishing his first task of increasing profitability.”Carly was
trying to drive revenue growth, and she was bleeding the printer
business by using the higher profits in that business to fund
unprofitable growth everywhere else,” said Tony Ursillo, stock analyst
for the Loomis Sayles Research Fund. “(Hurd) has dialed back the sales
growth objectives and focused those units on operating more
But whether he can drive revenue growth — next on his to-do list — remains to be seen.
he a visionary? I think the jury’s still out on that,” said Ursillo,
whose firm bought shares of HP when Hurd’s appointment was announced
and increased its position substantially not long after that.
added that Hurd has done a good job of recruiting and surrounding
himself with talented executives, including those from Dell, Palm and a
veteran of Siebel and IBM.
Hurd-ing in costs
After the “rock
star” CEO Fiorina was ousted by the board, Hurd, former CEO of NCR,
which makes bank cash machines and check out terminals, wasted no time
in slashing costs. He cut the company’s work force by some 15,000,
discontinued its pension plan in favor of a 401(k) and boosted
profitability in flagging businesses like servers and software.
company beat earnings and revenue estimates for three straight quarters
and also shifted its profit mix. It had been that 75 percent of the
company’s profits came from the printing business — mostly
“consumables,” such as laser and toner cartridges for printers. Now
printing is about half of profits, said Ursillo, not because that
business is declining, but because the servers and software businesses
are on the rise.
Mike Demos, equity analyst at Fifth Third Asset
Management, said those areas had nowhere to go but up, and he thinks
investors should be concerned about profit margins in the imaging and
printing group. Demos works in the firm’s core holdings group, which
does not own shares of HP, but he said the firm owns shares elsewhere.
printing business is still by far the most important franchise there,”
said Demos, noting that while it had a good quarter last quarter,
margins have been falling, an area of concern mentioned by other
analysts who follow the company. He adds that the business faces
competitive pressure from retailers who offer in-store refills of toner
A tough second act ahead
Investors may wonder if the
party’s over, now that the obvious cost-cutting steps have been taken
and shares have already enjoyed a big run.Ursillo thinks the
restructuring will continue to reap benefits, though sales growth is
unlikely to ignite anytime soon. Analysts on average expect 5 percent
revenue growth in fiscal 2007, beginning in October of this year.
Ursillo, more optimistic, thinks as much as 8 percent is possible.But
that won’t be easy. The company’s biggest business is under pressure
not only from domestic competitors like Dell (down $0.40 to $29.76,
Research) and Lexmark (up $0.13 to $45.38, Research) but also foreign
competitors and third-party ink suppliers.”That’s a huge challenge,”
said Kim Caughey, vice president and senior analyst at Fort Pitt
Capital Group. Caughey’s portfolios do not hold shares of HP, though
she monitors the stock closely. “The margins are falling in printer and
printing supply business.”
Ursillo said he finds HP’s forays into
consumer products, such as installing photo printing kiosks in
drugstores and selling TVs at Best Buy, as the Wall Street Journal
reported Friday, to be encouraging. “That is the perfect example of how
HP can take advantage of both its market position and brand to address
some large markets it doesn’t play in too well,” he said.
Caughey pointed out that making money in consumer products is tough,
given how fickle consumers can be about products and brands.
said growing revenues will be a much more difficult challenge for Hurd
than what he faced his first year on the job, adding that the same “law
of large numbers” that IBM (down $0.73 to $82.47, Research) faces is a
problem for HP as well — that is, when you already have upwards of $90
billion in annual revenue, growth in the double-digits is tough to come
But Ursillo thinks the stock can cruise up to $40 — from a
recent $33 — on restructuring alone. He points out that the stock is
trading at about 17 times expected fiscal 2006 earnings.
stock’s ability to keep outperforming hinges on continuing to gain
market share where it’s already present and on bringing to market some
new and innovative products, particularly on the consumer side,” he
said. “If we see evidence of that growing, I think the stock continues
to outperform through next year.”