Hewlett-Packard (HPQ) Crashes After a Bleak Revenue Forecast

Shares of computing giant Hewlett-Packard (HPQ: Charts, News) slid 15% this week, after the company forecast revenue declines between 11% to 13% for fiscal 2013, along with operating margins between 0% to 3%. HP stock has now hit a 10-year low, casting doubt on CEO Meg Whitman's promises of a slow but certain turnaround at the besieged tech giant.

HP has been in decline since the company's turnaround CEO Mark Hurd resigned in 2010 after allegations of personal misconduct. Hurd was replaced by the deeply unpopular Leo Apotheker from SAG, whose clumsy attempts to spin off the company's hardware business in favor of a pure software approach damaged HP's reputation further. At the same time, Apple's (AAPL: Charts, News) iPad and countless tablets powered by Google's (GOOG: Charts, News) Android operating system disrupted HP's core competency of personal computers, which run on Microsoft (MSFT: Charts, News) Windows and Intel (INTC: Charts, News) processors. Daily Chart
When Meg Whitman, the former CEO of eBay (EBAY: Charts, News), was named CEO in September 2011, HP appeared to be in an irreversible tailspin, despite her best efforts to assure investors that a long-term turnaround had already started. Whitman notably compared her plans for HP to Howard Schultz's revival of coffee giant Starbucks (SBUX: Charts, News), a comparison that was widely ridiculed in financial media. More recently, Whitman stated, "HP has a powerful set of assets, a culture of engineering innovation and a trusted brand. Now, we have to focus on bringing our incredible assets together to deliver for our customers, employees and shareholders." Although Whitman and HP's board of directors aborted Apotheker's plan to stop manufacturing personal computers altogether, the company's overall strategy still reflects Apotheker's original plan - to grow its revenue and market share in networking, storage and cloud services, and focusing on server-side businesses while slowly reducing consumer-end computer sales. Analysts believe that these measures may not be enough to keep customers and investors interested. HP was once a dominant force in both the corporate and consumer markets; however, it must now choose the former over the latter in order to stay relevant. Whitman also intends to simplify and shrink down the ailing HP Printing and Personal Systems segment. The company's troubled printer segment is losing revenue due to the increasing popularity of paperless solutions, such as tablets and larger smartphones. Consumers are using these paperless solutions, along with e-mail and text messaging, to cut down on the need for consumable print cartridges and paper. To make matters worse, the company's high-margin ink cartridges, which are sold on a razor to razor blades business model, are being replaced by generic brands from office retailers, such as OfficeMax (OMX: Charts, News) or Staples (SPLS: Charts, News). This causes HP's printers, which are sold at thin margins, to become a dangerous liability. JP Morgan analyst Mark Moskowitz went as far to suggest that HP may need to follow Apotheker's original plans and shed its unprofitable businesses altogether. "In our view, a courageous move would be for HP to sell the PC and printing businesses to help pay down debt and reset the company's revenue base, setting the stage for renewed growth over the long term," he stated in a note to clients. While some smaller competitors, such as China-based Lenovo, have made the swap from laptops to tablets seamlessly, larger companies such as HP and Dell (DELL: Charts, News) have struggled. In August 2011, HP discontinued WebOS, which it inherited from its $1.2 billion acquisition of Palm, and announced that it would no longer produce or support its WebOS smartphones or TouchPad tablets. Shares of HP trade a 3.5 times forward earnings with a 5-year PEG ratio of 5.3. This means that the stock is fundamentally cheap, but investors shouldn't bet on the stock to grow significantly any time soon. However, HP still pays a quarterly dividend of 13 cents per share - a hefty 3.6% yield at current prices. Other News About HPQ Hewlett-Packard: Wait For The Turnaround Is HP a deep value stock or a falling knife? Hewlett-Packard to Face Skeptical Wall Street Analysts doubt Whitman's ability to patch up this sinking ship. Other Stocks in the News Billionaire Einhorn Won't Give Up On General Motors Einhorn remains bullish on GM. Keep JPMorgan Chase Despite its Problems Do JPMorgan's recent woes signal a buying opportunity? Copyright 2012 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.

Published on Oct 5, 2012
By Leo Sun
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.

Copyrighted 2020. Content published with author's permission.

Posted in ...