*NEWS*THE URGENT NEED FOR A REBOOT @ HP !

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*NEWS*THE URGENT NEED FOR A REBOOT @ HP !

 user 2005-02-19 at 10:44:00 am Views: 89
  • #10385


    The Urgent Need for a Reboot at
    HP

    Investors cheered Carly Fiorina’s departure, but it will take new
    strategies, not just a fresh CEO, to get this outfit back on track

    From the comments of Carly Fiorina,Who stepped
    down as chairman and chief executive of Hewlett-Packard (HPQ ; S&P
    investment rank 3 STARS,hold;recent price, $21) effective Feb. 7, and those
    made to analysts by new Chairman Patricia Dunn, HP’s board had grown frustrated
    with the lack of progress toward profitability in its flagging computer-hardware
    business. A new set of skills was needed to guide one of the world’s largest
    information-technology companies, with some $80 billion in annual revenues.

    Many Questions remain, in our opinion at Standard & Poor’s.
    According to Dunn, the current HP strategy is the right one. Yet we believe
    Fiorina’s departure speaks to potential structural issues within HP — issues
    that may require more than a new CEO. Indeed, many of the same criticisms
    directed at Fiorina were made of predecessor CEO Lew Platt — lackluster revenue
    growth, inconsistent results, and lack of synergies between businesses in HP’s
    portfolio.

    EVERYTHING ON THE TABLE.  While
    HP’s board stated that it doesn’t foresee a change in the company’s portfolio,
    we believe all options should be on the table. The board, however, may be
    leaving such a recommendation up to a new CEO.

    Some of the strategy
    issues we think should be considered include:

    Should the printing and
    imaging division be spun off from the enterprise and PC divisions? What value
    does the PC business hold for HP, and can it ever achieve a cost structure to
    match Dell’s 9( ; 5 STARS, strong buy; $41)? Can synergies be created between
    the PC operation and the printing and imaging businesses, and what is the best
    way to achieve that goal? Finally, should HP follow the lead of IBM (IBM ; 5
    STARS; $95) and make a bigger bet in software and services to better compete in
    the high end of the IT industry?

    TOUGH
    DECISIONS.
      In our opinion, these tough decisions require an individual
    with experience of the technology industry. A computer-hardware background would
    be helpful, as well as a strong grounding in operations and an ability to
    discern the cost structure and systems that will help HP execute its strategy
    and compete.

    At the same time the board considers candidates, HP’s
    competitors are expected to aggressively pursue the outfit’s large corporate
    accounts. Dell made no secret of this in its quarterly earnings conference call
    with analysts and investors on Feb. 10. Even after HP selects a candidate, it
    will likely take some time before the new CEO can learn the company, the issues,
    and the markets, and affect a new game plan.

    We expect revenue growth of
    8% for HP in fiscal 2005. Admittedly, much of this would come off a somewhat
    depressed base in 2004. Specifically, if the company had not executed poorly in
    the third quarter of 2004, our revenue-growth estimate would be closer to 6%. In
    addition, we believe our revenue-growth forecast is vulnerable if HP witnesses
    attrition in its customer base following Fiorina’s departure.

    INVESTOR SENTIMENT.  However, we believe the stock price
    reflects these challenges. Trading at roughly 0.8 times sales, the shares are
    already at a discount to peers, and we believe they’re fairly valued. Using our
    discounted cash-flow analysis, we also arrive at a value approximating the
    current share price.

    The shares appreciated after Fiorina’s departure.
    We believe this reflects investor sentiment, which could be the catalyst HP
    needs to finally rethink its positioning in the marketplace, its product road
    map, and, potentially, portfolio changes. HP has a very large installed base of
    customers and is ranked the No. 1 or No. 2 vendor in all major categories in
    which it competes. There is value to unlock, in our estimation, but we believe
    it will take more than just a new CEO. The entire organization needs to
    reexamine its culture, markets, structure, and strategy, before its potential
    can be fulfilled.

    Note: Megan Graham-Hackett has no stock ownership
    or financial interest in any of the companies in her coverage area. All of the
    views expressed accurately reflect the research analyst’s personal views
    regarding any and all of the subject securities or issuers. No part of analyst
    compensation was, is, or will be, directly or indirectly, related to the
    specific recommendations or views expressed. Price charts and required
    disclosures for all STARS-ranked companies can be found at
    http://www.spsecurities.com

    Required Disclosures

    5-STARS
    (Strong Buy): Total return is expected to outperform the total return of the
    S&P 500 Index by a wide margin, with shares rising in price on an absolute
    basis.
    4-STARS (Buy): Total return is expected to outperform the total return
    of the S&P 500 Index, with shares rising in price on an absolute
    basis.
    3-STARS (Hold): Total return is expected to closely approximate the
    total return of the S&P 500 Index, with shares generally rising in price on
    an absolute basis.
    2-STARS (Sell): Total return is expected to underperform
    the total return of the S&P 500 Index and share price is not anticipated to
    show a gain.
    1-STARS (Strong Sell): Total return is expected to underperform
    the total return of the S&P 500 Index by a wide margin, with shares falling
    in price on an absolute basis.

    As of December 31, 2004, SPIAS and their
    U.S. research analysts have recommended 26.5% of issuers with buy
    recommendations, 61.3% with hold recommendations and 12.2% with sell
    recommendations.

    All of the views expressed in this research report
    accurately reflect the research analysts’ personal views regarding any and all
    of the subject securities or issuers. No part of the analysts’ compensation was,
    is, or will be, directly or indirectly, related to the specific recommendations
    or views expressed in this research report
    .