The headwinds facing the personal computer industry are well-known. A growing shift towards more portable and popular gadgets is causing major headaches for several companies like Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL). However, adding insult to injury, credit rating agencies are also showing a lack of confidence for PC makers.
What is Hewlett-Packard’s Latest Blow?
Late Wednesday, Moody’s Investors Service downgraded H-P’s long-term credit ratings, including the senior unsecured rating, by one notch to Baa1, three levels above junk status. The agency previously had a rating of A3 on the debt. The Prime-2 short term rating was affirmed, but Moody’s has a negative outlook on H-P. About $25 billion of debt securities are affected by the cut.
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The lower rating is due to expectations that “although H-P will maintain strong to leading positions in a number of product areas, the company’s credit profile will remain weaker than perviously expected over the intermediate term,” explained Richard Lane, senior vice president at Moody’s. It is the second downgrade from Moody’s this year, while Fitch and Standard and Poor’s reduced their ratings on H-P last year.
Why the Negative Outlook?
Moody’s is bearish on H-P’s debt outlook, because it has doubts on the company’s “ability to contend with the significant competitive, secular and execution challenges facing the company.” A “broad portion of H-P’s portfolio, including PC’s, some enterprise servers, printers, and services, representing over 75 percent of revenue, will face slow to no growth prospects over the coming years,” said Lane. In other words, Apple (NASDAQ:AAPL) and its slew of highly popular products are causing some serious question marks for H-P and the computer industry. Other companies such as Amazon.com (NASDAQ:AMZN) and Samsung also offer tablets that are weakening demand for traditional PCs.
This was widely known by the market, but Moody’s offers little hope on the future…
H-P’s credit ratings are unlikely to be raised over the next year, and the recent $8.8 billion write-down tied to its acquisition of search software developer Autonomy is not helping the case. The charge is linked to the “associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term,” explained H-P in a statement.
Along with the “serious accounting improprieties,” there were also “disclosure failures” and “outright misrepresentations” at Autonomy that occurred prior to its acquisition for $11.5 billion in 2011 and were discovered by a nearly seven-month-long internal investigation. The investigation was launched after a senior member of Autonomy came forward, H-P said.
Due to its poor track record, Moody’s expects H-P’s acquisition activity to be minimal over the next few years, “as management focuses more on internal research and development over acquisitions,” signaling another headwind in catching up to iOS and Android (NASDAQ:GOOG) based products.
CHEAT SHEET Analysis: Does H-P Have a Positive “Catalyst for its Stock Price?”
One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. Unfortunately, Moody’s is not the only one with a negative outlook on H-P. Shares of the tech giant are down about 50 percent year-to-date. The company may receive a bounce purely from bottom pickers, but the lack of catalysts and the issues surrounding the Autonomy acquisition should make many investors cautious. For investors seeking an unloved dividend name in tech, H-P still pays a juicy dividend and has a solid cash position, but so does Microsoft (NASDAQ:MSFT), and it comes with less baggage.
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