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Hewlett-Packard’s (HPQ) Meg Whitman Looks to Starbucks (SBUX) for Inspiration

By: , dated June 7th, 2012

This week, Hewlett-Packard (HPQ: Charts, News) CEO Meg Whitman compared the ailing PC maker to coffee giant Starbucks (SBUX: Charts, News), claiming that HP will rise again from the brink of extinction, just as Starbucks did over the past five years. The comparison was widely quoted and mocked as lofty rhetoric, and called unwanted attention to HP’s serious fundamental flaws. Since the dismissal of CEO Mark Hurd, widely regarded as the turnaround leader of HP, shares of HP have plunged 46% in less than two years. During these two years, HP has already been led by two new CEOs – Leo Apotheker and Meg Whitman – who have failed to shore up a defense against Apple (AAPL: Charts, News) or its other Wintel competitors.

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At the end of May, HP won some investor approval when it announced that it would lay off 27,000 employees, or 8% of its global workforce, to cut costs by $3 billion to $3.5 billion per year. The cuts are intended to “enable investments in strategic, higher-growth areas,” such as cloud computing, software and data servers, noted ISI analyst Brian Marshall.

However, the company’s second quarter profits still slid 31% to $1.6 billion, or 80 cents per share, from the previous year. Revenue dipped 3% to $30.7 billion. Although these topped analysts’ pessimistic estimates on both the top and bottom lines, the results failed to attract new investors. HP’s enterprise, printer and services groups were also dragging the company down, drawing unfavorable comparisons to its besieged industry peer, Dell (DELL: Charts, News). Heavy exposure to Europe also dampened analyst expectations for the current quarter.

With its core competencies being threatened by smartphones and tablets, Whitman’s comparison of her company to Starbucks seems off the mark. In 2008, Starbucks’ returning CEO Howard Schultz revived the company by eliminating the company’s side businesses – such as music CDs, books and gifts – and focusing on the company’s core competency – high-priced, quality coffee. HP, on the other hand, has lost strength in its core competency – desktops and laptops – which have become such unprofitable liabilities that Leo Apotheker attempted to divest of both during his short, stormy reign.

Whitman told investors that like Starbucks, HP would need approximately five years to turn around. “Usually these kinds of turnarounds take anywhere between four or five years,” stated Whitman. “There’s nothing fancy about these turnarounds. This is not advanced business, this is 101.” Whitman was widely criticized for this statement. Many analysts believe that this is indicative of Whitman’s belief that HP needs to get back to the basics, as Starbucks did, to start growing again.

Analysts and investors, though, have a different theory. In 2010, Apple’s seminal iPad disrupted the entire desktop, laptop and netbook businesses. The subsequent torrent of Android tablets further eroded global demand for Wintel machines. Although Dell, during its first quarter earnings announcement, acknowledged the need for a viable tablet to remain competitive, Whitman has yet to admit that tablets are a credible threat to HP’s aging business model.

While Whitman is eager to compare HP to Starbucks, bearish analysts are unfavorably comparing the troubled PC maker – still the largest in the world – to the likes of Eastman Kodak, Yahoo (YHOO: Charts, News), Research in Motion (RIMM: Charts, News) or Nokia (NOK: Charts, News). Although HP, with a market cap of $44 billion, is unlikely to fade away anytime soon, the company will have to evolve its business, as IBM (IBM: Charts, News) did in 2005, when it sold its personal computer business to Lenovo. Like IBM, HP will have to focus on higher margin, non-hardware businesses if it wishes to stay relevant in the coming decade.

Shares of HP are fundamentally undervalued, trading at 5 times forward earnings, with a 5-year PEG ratio of 1.5. The company pays a quarterly dividend of 13 cents per share.

Other News About HPQ

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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