Hewlett-Packard (NYSE: HPQ) has long been an industry pioneer, but HP is currently struggling keep up with its peers in Silicon Valley such as Google (NASDAQ: GOOG ) and Apple (NASDAQ: AAPL). HP has underperformed the S&P 500 when comparing from this time last year; the stock is down this week about 35 percent and is hovering at a 9-year low. Things don’t look good for the Palo Alto, CA based firm right now.
Does this turmoil mean it’s a big moment for value investors to buy and hold?
Meg Whitman was appointed CEO a year ago and her remarks on Wednesday hit the nail on the head. There is not enough research and development to deal with the aggressive competition and HP’s products have a lack of focus. HP will need to learn from the new kids on the block like Facebook (NASDAQ: FB) and Groupon (NASDAQ: GRPN). Whitman has promised that changes will take shape to transform HP, but things look grim for the near future.
HP By The Numbers
The stock tumbled Wednesday after Whitman’s speech at the firm’s analyst day falling from $17.13 to $15.94. Investors are wondering if HP is indeed a bargain stock, but the fact is that the stock has been falling for a long period of time.
It is true that its earnings per share of $2.98 is up from a decade ago when it was at $0.83. Additionally, HP pays out an annual dividend of $0.52 and it does have a high dividend yield when compared to industry leaders. The dividend appears to be sustainable when looking at the financials of the firm. However, when it comes to growth, HP is the industry laggard.
Is Business Erosion a Concern?
Furthermore, HP may see a lot of its business get eroded with the shift to mobile devices and tablets. It doesn’t seem likely that HP can compete in these high growth markets. Also, it may not be feasible for HP to introduce a tablet that could rival Apple’s iPad. Although, it does have the HP ElitePad 900 that some businesses use.
The mobile shift is a future trend and so are the internet and online services. Google recently celebrated its fourteenth anniversary and has been innovating at a great pace with interesting products like a self-driving car on the horizon. HP is shedding a large percentage of its 350,000 workforce and its shareholders must be hoping that the company will bring in some brilliant young minds who could match what is going on in industry trailblazers such as Facebook and Groupon.
HP has $20 billion in net debt and it is pursuing an acquisition-driven strategy that saw HP take the enterprise software company Autonomy and Electronic Data Systems under its wing. This has led to the short-term losses. However, this is where HP is hoping these acquisitions will fuel its turnaround. In 2015,the enterprise software market could be worth $15 billion. HP has remained focused on providing Big Data, Security and improvements in Cloud Management.
The issue is that HP lags behind its competitors in the areas that it has forecasted growth. Cisco Systems (NASDAQ: CSCO), International Business Machines (NYSE: IBM) and market leader Oracle Corporation (NASDAQ: ORCL) have a considerable product and capacity advantage over HP in these areas.
Analysts at investment firms like JP Morgan and Goldman Sachs have written off HP based on the fundamentals. This is not surprising considering that the stock price is at its lowest level in 10 years. The price targets that these investment banks are recommending is getting lower with Deutsche Bank having it at $10 and Goldman putting the price target at $16. On the other hand, it must be noted that the company has a lot of financial flexibility and valuations show a lot of potential when they are based on past performance.
At the same time, Meg Whitman faces a big challenge in guiding the PC giant towards the vision she has for it. It could be argued that she was exaggerating the problems that plague the tech giant so that she could under-promise and over-deliver. This might mean that HP would have to move away from printers and computers where the company made its fortune.
Takeaway: Be Cautious with HP
HP could see active trading today and the sell-off could force the stock price to fall even further than its close at $14.91. Whitman stressed the word multi-year a lot, but it might take a decade long plan to get back the billions of dollars of market value that the decline in the stock price caused on Wednesday in response to her comments.
There could be a short-term rebound if HP decides to sell a division or change strategy considerably. But when looking carefully at the fundamentals, it implies lower earnings for the foreseeable future. HP is not a good buy at this time and there is quite a bit of instability. The stock may actually be a value trap.