Is HP’s Turnaround Strategy Sustainable?
The fundamental problem facing the technology giant Hewlett-Packard is that some of the products that make up its biggest lines of business are in a long-term decline, and that new products aren’t yet generating enough revenue to make up for them. That makes the multiyear restructuring and turnaround plan put in place last year by CEO Meg Whitman essentially a fight against time.
Shares of HP rose by more than 13 percent to $24.09 as of 10:15 am ET. The catalyst was yesterday’s quarterly earnings report that contained better-than-expected profits amid sales that fell short of consensus forecasts by more than half a billion dollars. Analysts this morning are questioning whether or not the company can maintain the veneer of progress toward a turnaround in the quarters ahead.
“Shrinking your way to profitability buys time but doesn’t equal a turnaround,” was the headline on a research note from Chris Whitmore of Deutsche Bank Securities this morning. With revenue down by 10 percent year on year, and sales in major business segments declining between 1 percent (printing) and 20 percent (personal computers), HP’s success this quarter and last appears to have been more about minding its cash flow and costs carefully, and less about selling more of the goods and services that make it money.
“HP is sacrificing market share, delaying research and development investment and the financial benefit of past restructuring actions to support near-term profitability which in our view is not sustainable,” Whitmore wrote.
Whitman explained yesterday, both in a conference call with analysts and in an interview with AllThingsD, that HP walked away from deals to sell PCs and servers that didn’t contain enough profit. It had the result of yielding some of its market share ground — HP leads the world in both PC and server sales — to Dell.
“Unsustainable,” appeared to be the word of the day among analysts covering HP. It also appeared in a note from Goldman Sachs analyst Bill Shope, who reiterated his “sell” rating on HP shares. HP’s exposure to “distressed end markets” will eventually overwhelm whatever actions it may take in the short- to medium term. Brian White of Topeka Capital Markets also maintained a “sell,” advising shareholders that yesterday’s 13 percent after-hours surge on HP’s share price represented an opportunity to do just that.
Hoped-for growth from sales of new products like Project Moonshot and new networking products are good, but even that success may not be enough replace the revenue that’s being lost, worries Evercore analyst Rob Cihra. “Low-power Moonshot servers, higher-end printing and software-defined networking all help but much more seems needed to move such a massive needle,” he wrote in a note to clients today. “Hopes for FY13 stability otherwise just appear to flow from deep restructuring cuts.”
Brian Marshall of ISI presented a similar view in a note to clients: “As global economic growth softens and PCs and printers face secular decline, it will be challenging for large technology vendors such as HP to find significant sources of new growth that can move the needle on approximately $110 billion of annual revenue.”
When surveying analysts on the subject of HP, it doesn’t take long to return to the notion of a breakup. HP is worth more in pieces, the argument goes, than as a unified company. That’s what will happen if HP isn’t able to turn the corner soon enough, argues Toni Sacconaghi of Sanford Bernstein, in a note today. While Sacconaghi has an “outperform” rating on HP shares, based on its prospects for improvement over the next six to nine months — an opinion he explained in detail on CNBC yesterday — he remains convinced that, after that, HP will either fix what’s broken or break itself up.