HP’s CEO YEAR 1 ,KICKS BUTT :YEAR 2…?

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HP’s CEO YEAR 1 ,KICKS BUTT :YEAR 2…?

 user 2006-04-03 at 1:24:00 pm Views: 70
  • #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.
    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.”