The HP ($HPQ) Shocker – This Must be the Bottom, Right?

If you own or have followed HP stock (HPQ), you are no doubt shocked by the headlines of accounting fraud at Autonomy and the $8.8 B writedown HP took in Q4. It is in fact a testament to the lack of credibility of the current HP management that most market watchers are still debating if there is truth in these disclosures.

Perhaps Autonomy did mis-represent their accounts and HP overpaid for the acquisition. Whether they did or did not, it doesn’t matter. The problem with HP is not this one time charge, although in the short term it does nothing to improve investor confidence. The problem lies in the utter and complete mismanagement of the company.

  1. Wrong Strategy: Apothekar wanted to get rid of the low margin and commodity PC business. Whitman decided to keep it
  2. Declining Metrics: Revenues, Margins and Earnings have been declining in ALL the core segments HP competes in. HP can’t seem to be able to grow its business in a fast growing segment like Cloud computing. The only segment that still shows reasonable growth is Software at 14% year over year. Twisted irony then, this includes the Autonomy business
  3. And I have already spoken about how HP lost its way.

At some price though, every stock becomes a buy. Right?

Arguably so. The question is, what is this price for HP?

Apparently, the analysts who have been recommending HP as a value stock are now throwing in their towels. But let me come back to my earlier statement on why this Autonomy writeoff does not matter.

As of today, HP’s book value (shareholder equity) is $22.8 Billion. This equity includes $35.6 Billion in Goodwill and Purchased Intangibles, related to HP’s past (failed) acquisitions such as Compaq, EDS, 3Com, Palm, etc. A large portion of this will eventually be written down, quite possibly making the shareholder equity negative. The tangible book value is already negative, so it is just a matter of timing and recording these writeoffs to make it official.

In other words, HP’s mindless acquisition spree in the last decade or so has wiped out the shareholder value in the company.

The balance sheet is worth zilch. Earnings are declining with no visibility into how they can be revived.

Right now I do not recommend paying anything for HP shares. It is NOT a value stock.

Meg Whitman says this is year 1 of a 5 year turnaround. At the current rate of progress, I doubt that the business will start improving in the next 4 years, unless there is a CEO and top management change that brings in new and better ideas and a defined strategy.

If there is any material change in the next few years, I will take another look.


  1. arohan says

    @retiredtennis Probably the best thing to do. A few of these may be the buys of the decade but it is hard to know which ones

  2. pbanik says

    I would like to say I was surprised by this, but I can’t add much more to what Roger Wohlner already stated.  Any thoughts on the recent decline in INTC’s share price?  This company’s P/E ratio is below 9, and considering how much cash it holds relative to its’ debt level, it looks like a steal. If the looming fiscal cliff does indeed happen, I wonder if we can see this stock trade below $13, as was the case in  February 2009, when it was at $12.74, which would represent a P/E ratio of 5.56, assuming the same EPS as now.  That would represent a dividend yield of over 7% at that share price, assuming the same dividend.

    • says

      @pbanik INTC stock is reflecting the general view that it is getting left behind in mobile/tablets (since the PC sales are declining and mobile/tablets are taking up the share). Intel can afford to give up some time to wait and see how the market develops before coming out with their own product. What they lose in time, they more than make up in better design and their distributive reach

  3. says

    Sad to see a once great company being run into the ground by the morons (sorry couldn’t find a more eloquent word) who have “run” the company over the past decade (that includes you Ms. Fiorina).  Hewlett and Packard were great men, sad to see their once proud company run into the ground.

    • says

      rwohlner , I fully understand the sentiment and I suspect it is shared by countless HP employees and non-employees alike. One can take some solace in the thought that Agilent Technologies was spun off and will carry on the HP way

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