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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.
NEW 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.
Shareholders 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 efficiently.”
But whether he can drive revenue growth — next on his to-do list — remains to be seen.
“Is 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.
But he 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.
The 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.
“The 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 cartridges.
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.
But Caughey pointed out that making money in consumer products is tough, given how fickle consumers can be about products and brands.
Demos 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 by.
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.
“The 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.”
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