Will Hewlett Packard Ever Win Under Whitman?

Hewlett-Packard (NYSE:HPQ) shares hit a nine-year low on Thursday after CEO Meg Whitman warned of a steep decline in earnings next year, with revenues likely to fall in every business division except software.

Wall Street had been hoping for a quicker turnaround under Whitman, who replaced Léo Apotheker as chief executive just over a year ago. Whitman’s plans to revive the company center on transforming it into an enterprise computing corporation that competes with the likes of IBM (NYSE:IBM) and Oracle (NASDAQ:ORCL).

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On Wednesday, Whitman told investors that the company’s recovery would only start to become visible in fiscal 2014, when its investments begin to pay off. But “nothing new was really said in terms of strategy,” notes Shaw Wu, an analyst with Sterne Agee. “And the problem here is there is lack of investor confidence in the current strategy.”

The company is struggling with its credibility on Wall Street — in recent years, margins have dropped significantly, the company has decreased IT spending, and has begun an organizational overhaul that includes laying off thousands of workers. Now analysts are concerned that the company is focusing its efforts on a long-term strategy while continuing to suffer losses in the short term.

Whitman gave a gloomy outlook for enterprise services, the division on which she is centering the company’s rescue plan. Revenue in that division is expected to fall 11 to 13 percent in fiscal 2013, and be barely profitable, with operating margins of zero to 3 percent. Meanwhile, IBM recently raised its full-year earnings outlook despite flat software revenue in the second quarter and a 2 percent decline in services.

HP shares fell 13 percent on Wednesday in the biggest single-day decline since August 2011, when the company, then led by Apotheker, announced a strategic decision to discontinue its webOS device business, the possibility of divesting its consumer PC division, and its acquisition of British software firm Autonomy Corporation. On the day those announcements were made, HP shares dropped 25 percent to $23.60. Shares closed Thursday at $14.94.

Wednesday’s investor event seemed to be more about blaming the company’s problems on mismanagement in the past than focusing on plans for future growth. “The single biggest challenge facing Hewlett-Packard has been changes in CEOs and executive leadership, which has caused multiple inconsistent strategic choices, and frankly some significant executional miscues,” Whitman told the conference in San Francisco. “This is important because as a result it is going to take longer to right this ship than any of us would like.”

It’s true that HP was already in a bind when Whitman took the helm, but shares have fallen 35 percent under her leadership as she’s so far failed to gain investor confidence. The company’s transition to enterprise services has been slow and so far relatively fruitless, while shortly before Apotheker’s untimely exit last year, HP dropped out of two of the only booming markets left: tablets and smartphones.

Since the advent of Apple’s (NASDAQ:AAPL) iPad in 2010, HP’s capitalization has dropped from an all-time high of $104.5 billion to a market value today of around $30 billion. And yet, after its failed Touchpad tablet, HP has abandoned efforts to capture even a small fraction of the ever-growing tablet market, at least publicly.

Meanwhile, PC sales continue to decline as tablets and smartphones fulfill many of their roles, while costing less and being significantly more portable. Slowing corporate spending is also taking its toll on HP’s business.

The company’s current forecast for overall earnings in 2013, excluding restructuring charges and other items, is between $3.40 and $3.60 per share. That’s well below Wall Street’s average forecast of $4.18, according to Thomson Reuters I/B/E/S.

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