Can Hewlett-Packard Turn Around the Titanic?

On February 16th, 2011 tech giant Hewlett Packard (NYSE:HPQ) was trading at $48 a share. Today, August 22nd, 2012 the share price opened at $19.50.  In 2006, HPQ was on top of the world, having overtaken rival Dell (NASDAQ:DELL) as the number one PC manufacturer in the world.  What happened?  For starters you have only to look at the fact the company is now on its fourth CEO since 2005.  Despite all its troubles, HPQ was targeted in early 2012 by several big name value investing firms, including their current largest institutional holder, Dodge and Cox, who actually increased their HPQ holdings.

So what is going on with HPQ right now?  Are value funds right, or is Hewlett Packard nothing more than a bloated value trap?  Should you BUY, WAIT and SEE, or STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

C = Catalyst for a Stock’s Movement

It can be difficult for the investing community as a whole to watch a once giant of an industry flounder about as it descends to a mere shell of its former self.  Right now there are still many who see any tiny evidence of a turnaround story as a potential catalyst for the share price.  Thus recent news HP has established a mobility unit to guide the company’s reentry into the tablet market with a Windows 8 version ignores the failure of the company’s prior attempt with tablet computers.

The company has been through massive job reductions, continual restructuring, and management changes at all levels.  The announcement of Meg Whitman as the person best suited to turn the ship around was met with relief, but even the most bullish of analysts admit that the turnaround will take three years or more to right this sinking ship.

HPQ is reporting earnings in a matter of days and they have already warned of a massive $8 billion write off along with raising their prior earnings estimate up from a range of 94 to 97 cents a share to $1.00 per share.  Any surprises in this release and any solid evidence the turnaround story is intact and underway could give the share price a bump.

H = High Quality Pipeline

The new mobility division is reportedly working on a new table computer named the Slate 8, which will use the soon to be released Windows 8 operating system.  A successful launch could provide some evidence of the viability of the turnaround story.  This is the only potentially catalytic new product HPQ has in its pipeline.

E = Equity to Debt Ratio is Close to Zero

Hewlett Packard continues to the pay the price for a decade of acquisitions that have failed to improve earnings and weakened the company’s financial position.  Their current debt to equity ratio is .73 or 73%.  Their total debt as of the most recent quarter is $30.1 billion with only $8.3 billion cash on hand.  Debt has increased every year for the last five years.  In contrast, competitor Dell (NASDAQ:DELL) has total debt of 9 billion with $18.7 billion cash on hand as of the most recent quarter.  The crown jewel of the tech sector, Apple (NASDAQ:AAPL) has zero debt.

A = A Level Management Runs the Company

Meg Whitman inherited a mess and the jury is still out as to whether or not she can affect a turnaround.  To her credit, she has replaced top executives across the board as well as cutting jobs.

T = Technicals on the Stock Chart are Strong

HPQ’s simple moving averages are heading in the wrong direction.  On Friday August 17th the shares closed at $19.52 The 200 Day SMA (simple moving average) was $24.0 with the 50 Day SMA at $19.55 and the 20 Day at $18.20.  HP pre-announced some of its dismal Q2 earnings in August and it appears that coupled with recent favorable legal decisions these factors may have led some value investors to get on board since the bad news is already out there and winning a lawsuit against Oracle is good news.

S = Support is Provided by Institutional Investors & Company Insiders

Hewlett Packard is 75.09% institutionally owned and as yet there appears to be no mass exodus out of this stock. Yahoo finance data provided by Thompson First call shows a 6.39% drop in institutional holdings, but that number is for Q1 2012. The Chairman of HPQ’ Board of Directors and one other director have been buying stock recently. Hewlett Packard’s top five institutional holders are Doge and Cox,  State Street, Vanguard, Fidelity, and BlackRock.

T = Trends Support the Industry in which the Company Operates

Tech industry trends scream mobile, mobile, and more mobile and HPQ is woefully deficient here.  Even stodgy old Microsoft (NYSE:MSFT) is moving into mobile hardware as well as software offerings.  HPQ has as yet no plans to enter the smartphone market and their server segment is vulnerable to completion from the exploding entries into the cloud computing segment, which could eventually make in-company servers obsolete.

Conclusion

In a recent interview CEO Meg Whitman said this about paring back product offerings and the company’s PC business — “As I see it, everything stays. Each of the pieces fit together. They are very big and significant businesses in their own right. The PC business is at $40 billion and number one in the world.”

On the basis of that statement alone HPQ should at best be a WAIT and SEE.  There has been much written about the death of the PC that ignores the simple fact that as yet you can’t crunch a spreadsheet or prepare a professional business presentation or write large documents on a tablet.  It seems ludicrous to argue against a decline in PC/Laptop sales as smartphones improve their capability and tablets proliferate.  So with HPQ you have the largest PC manufacturer in the world facing declining PC/Laptop sales; a server business in some jeopardy; and as yet not a single viable mobile product in the marketplace.  Perhaps HPQ is worth a gamble for a well-funded institutional behemoth like Dodge and Cox; but for the rest of us HPQ sure seems like a STAY AWAY.

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