August 22, 2013 4 Comments
[click on images to enlarge]
All lines point south. Except stock price. To see real HP, one must turn Wall Street’s view upside down.
IBM & HP: Two Peas in a Pod
It has been more than seven years when I wrote the story IBM vs. HP: A Tale of Two Blues (June 2006). If I were to do it today, its title would be “Two Peas in a Pod.” Both computer giants are shrinking. Both are stuck in place while desperately trying to create an impression of change. Neither is able to break the shackles of their corporate cultures. But only one has been favored this year by Wall Street. HP stock is up 78% in 2013 to-date. God only knows why…
Which is why it might be instructive to bring back that image we published a few weeks ago. There is no room for reason at the Wall Street manger. What’s been happening with the HP stock this year is another proof.
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THIRD QUARTER ON TARGET YET STOCK DROPS
HP’s third quarter results were “on target,” as far as Wall Street is concerned. Yet its stock dropped 8% in after-hours trading. Why? Because investors may be starting to realize that they have been falling for their own hype. Just as what happened with IBM last month.
In HP’s case, the latest results marked the eighth consecutive quarter of year-to-year revenue and EPS declines. In other words, HP’s downward trend is even longer than IBM’s.
And no wonder. All major HP lines are shrinking. The PC unit was the worst performer in the latest quarter. Revenue dropped 11%. The printer unit fell 4%. Enterprise group and enterprise services each declined 9%.
HP CEO Meg Whitman said on today’s earnings call revenue growth is unlikely before the close of the fiscal year ending in October 2014. That sent the stock tumbling.
Well, at least the HP CEO is being a little more realistic than the other Big Blue CEO. When IBM disappointed the market with its second quarter results last month, CEO Ginni Rometty continued to promise a turnaround.
“We expect continued improvement through the second half of the year,” she said in a release (see IBM in Troubled Waters Again).
Actually, neither company is doing anything radical enough to constitute real change. Both will need to basically reinvent themselves from ground up if they are really to move up. Neither seems willing or able to do it. Maybe they should spare their shareholders the agony of watching their favorite Big Blues shrink year after year.
“Commoditization is driving the growth and (leading to) lower margins,” he said.
To I pointed out that growth and margins needn’t be mutually exclusive. Creative companies can have both. I cited Apple and Google as examples. “They are experiencing both high growth and high margins,” I said.
The professor agreed. “All these companies (industrial era relics) used to be Apples and Googles once,” he replied. “But they lost that edge. And now they have to choose between growth and margins.”
And then he dropped a bombshell. He said that managing a company to extinction was “a viable low risk management strategy.” (see Globalization Pandemic, Oct 31, 2007).
Prof. Persival then cited Kodak as a case in point. It was a prescient example. For this American legend founded in 1880 filed for Chapter 11 bankruptcy in Jan 2012. Creditors stand to get only 4¢ or 5¢ on the dollar for their investments and that they’re entitled to be paid before shareholders are. Generally, holders of common stock do not receive anything for their shares when a company emerges from bankruptcy.
See what I mean about saving the shareholders the agony?
By the way, perhaps you have noticed the juxtaposition of the HP logo to help see the real picture at that company today?
What do you suppose missing suffix of “dy” should be? Dy-ing or dye-ing? You decide. 🙂
Happy bargain hunting!