THE URGENT NEED FOR A REBOOT @ HP !
THE URGENT NEED FOR A REBOOT @ HP !
2005-02-19 at 10:46:00 am #10386
The Urgent Need for a Reboot at
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 (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
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?
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
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
(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
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
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
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.