Second quarter performance was mostly terrific, some might say -- so why did the stock crater? Some say Cathy Lesjak shouldn't have been so bullish earlier in the year, and that Leo Apotheker had to retract her forecast -- perhaps true. Note that what he said was "earnings of $5.00 vs earlier a $5.20 statement". People (or automated trading programs at least) ran for the door.
But consider, HP has always been strongest in 1st quarter, due to its shifted fiscal year, and it has never been a "fourth-quarter phenomenon company" in sharp contrast to IBM, for example. And the first quarter was $1.17, up 27% vs. a years ago, while this quarter at $1.05 was 15% ahead of a year ago. So, even if there were no rain clouds on the horizon, they've got a tall order ahead to get a second half of $2.98 vs a first half of $2.22. So, retrenching a bit makes all sorts of sense without invoking the shibboleth of "what Hurd did to gut things, that now must be restored" or the issues surrounding Japanese supplychain with the earthquake and subsequent disasters in that unfortunate nation.
More instructive to dig a bit deeper, in my view:
PCs -- this is the Achilles Heel, perhaps. The i-Pad is going gangbusters, have you heard? And HP's tablet entree is late, off-target, and ill-equipped to compete. So that game is probably lost for this round at least. Does it matter to PCs? Sure. And we now have 1Q and 2Q results. HP PCs, the leader in the world, is DOWN 12% in Q1, and DOWN 23% in Q2 for the consumer markets. Thank goodness Corporate America (and the world) like PCs (and cannot figure out yet how to make iPads useful for work rather than entertainment), so corporate PC sales are UP 11% in Q1, and a remarkable 13% in Q2. Overall, HP PSG performance (never mind the re-org structure) is more-or-less holding its own, down 5% overall in revenue, and down from 6,4% to 5.7% in net profit.
Is Dell the issue? Not really. Their total corporate growth for the identical time period, was 1%, vs. HP overall at 3%. They now get 30% of their business from the enterprise level of servers, storage, and services as well. They reported DOWN 7% for their consumer biz, so in that $3B segment, they lost less than HP.
The real question for consumer level stuff is whether HP really can play here at all. It has not been a historic strength; it is unlikely that the current holdings will burgeon again, and it is clear from hindsight that the vaunted HP R&D creativity has yielded next to nothing compared to, say, Apple (not to mention Sharp, Canon, Android, and other hardware/software folk). This ignores completely any question about Google, Facebook, Skype, LinkedIn, Amazon, etc. services.
Enterprise stuff, sans services. HP, first quarter was down 2%, but Q2 was up a very solid 15%, vs. Dell, up 5%. Hummn. Here the right comparision is IBM (or Oracle, Cisco, WHO?). This could become solid, esp. when combined with Software up 20+% at great margins, and Enterprise printing up 41% after a solid 33% in Q1. So, we'd have to give HP very high marks in this space -- it has growth, margins, and a big territory. If the i-Slate (sorry, I cannot get past the old name) works for this arena, it could be GOOD. Bear in mind that the i-Phone, for rounds 1, 2, 3 and now 4 have yet to challenge the RIM Blackberry. It is Android, not an Apple mentality that serves corporate requirements. So, stay tuned, but this is where HP action is.
Printing. My Gawd, this just keeps performing. Up 5% in Q2 after up 7% in Q1. Clearly, the enterprise growth rates are helping, but paper must not be dead yet.
Services. Up 2% with a 15.2% margin. Vs. down 2% with a 16.0% margin in Q1. This is the truer concern, rather than PSG. This MUST perform. And these growth rates are anemic. And IBM is thumping HP right now, not to mention a host of dedicated companies. And this is the group that has not yet perceived that the HP Way exists, c.f. the comments of Peter Hill in his Amazon review of our book or the blog post earlier today. So Apotheker has to address this if HP is to find this business of value. And when you factor in all of the Corporate Board members, it is laughable to imagine that their expertise is very appropriate to this side of the business (c.f. Tiernan Ray's rant in Barron's). The E-Bay model was hardly "corporate services" and that charitably would be the closest of anyone on the Board to this world. So Apotheker, to a significant degree, is going forward here without much hands-on guidance.
BUY -- SELL -- HOLD?
The good news is that HP is currently discounted in the marketplace pretty well, so if you weren't an owner, you might consider it now. But it will be a longer rather than shorter 'play' if we are reading this correctly.