Market Overview

How Hewlett-Packard (NYSE: HPQ) Lost Its Way



By: Chad Fraser

Hewlett-Packard(NYSE: HPQ) announced the latest step in its ongoing restructuring yesterday, when CEO Meg Whitman announced that the company would merge its printer business with its personal computer division.

Said Whitman: “This combination will bring together two businesses where HP has established global leadership. By providing the best in customer-focused innovation and operational efficiency, we believe we will create a winning scenario for customers, partners and shareholders.”

Investors weren’t convinced, however. Hewlett-Packard stock dropped 2.2% on the news.

Hewlett-PackardDrifts While the Competition Leapfrogs Ahead

If you’re having trouble following the company’s twists and turns as it tries to figure out how to compete in a world that’s rapidly embracing mobile devices over desktops and laptops, you’re not alone.

Consider that two years ago, Hewlett-Packard looked like it was set to make a big splash in the mobile space. On April 28, 2010, it bought Palm for $1.2 billion. Then it abruptly pulled back in August 2011, halting production of its only tablet computer, the HP TouchPad and exiting the mobile space entirely.  

The company then decided to sell off its computer business in August 2011, prompting an incredulous reaction from investors (the stock dropped more than 20% on the day of the announcement). In his August 23 article, “Hewlett-Packardis Getting Out of PCs: What a Disaster!” Investing Daily’s Jim Fink wrote:

“While it’s true that co-founders Bill Hewlett and Dave Packard were never interested in commoditized products like PCs, the fact remains that once a company has become the world’s largest of anything, it achieves competitive advantages of scale and scope that generate real value. For example, volume discounts on purchases of commodity computer hardware parts will be lost.” 

Fortunately, Hewlett-Packard reversed course, deciding that its PC business was too important to get rid of after all.

Turmoil at the Top Has Been an Ongoing Distraction for Hewlett-Packard

Consider, too, the company’s decade-long history of head office struggles, which Fink also laid out in his article:

“With the 1999 CEO appointment of AT&T marketing executive Carly Fiorina—a person with no technical background whatsoever … the long slide and disintegration of HP began. Next up was HP chairman Patricia Dunn, who illegally spied against fellow HP board members and had criminal charges filed against her. This farce was followed by CEO Mark Hurd resigning after charges of expense report fraud and sexual harassment became public.”

Analysts Don’t See How Whitman’s Plan Will Help Hewlett-Packard

Like Hewlett-Packard investors, the business media largely panned Whitman’s latest plan. In an article entitled “HP’s Latest Move Draws Skepticism,” observed that Carly Fiorina had tried the same thing right before she left the company. Hurd brought the two divisions back together in 2005.

Most analysts, however, simply didn’t think there was enough crossover between the two businesses to allow for big savings or strong sales growth. In a CNNMoney article entitled “HP Should Stand for Help, Please!” Shaw Wu, an analyst with Sterne Agee, said: “These businesses may sell to the same customers, but they are very different. Printers last a lot longer than PCs, so the product upgrade cycle is very different.” 

Nonetheless, Wu has a buy on the stock, largely because it’s cheap, with a p/e ratio of just 7.9.

The Key to a Hewlett-Packard Turnaround? Get Back to Making Quality Computers

Over at, Louis Bedigian had a simple prescription for the company’s problems: woo customers back with great products. In “Instead of Innovating, HP Is ‘Masking the Incompetency,’” he writes:

“Consumers don’t see or care about who leads the company—all they care about is the quality of the products they’re buying. Despite the many, many loyal users who support the company year after year, HP has continually tarnished its own image by releasing cheap laptops that don’t last.”

His solution? Take a page from Apple’s playbook and focus on one game-changing device: “As soon as Apple created one device [the iPod] that everybody wanted to own, consumers were curious about—and eventually wanted to purchase—every Apple device.”

That almost certainly means a return to mobile devices for HP. Perhaps, as some have suggested, that could come in the form of a new tablet designed for Microsoft’s (NasdaqGS: MSFT) new Windows 8 operating system, which has gotten favourable reviewsso far.

Does Hewlett-Packard’s Latest Dip Make It a Buy?

So, should you take Wu’s advice and snap up Hewlett-Packard stock now that it is trading at such a low price? Jim Fink addressed the same question in his 2011 article. Given the company’s lack of progress since, his response still rings true today:

“I would be in no rush to buy [HP stock]. Massive corporate restructurings and acquisition integrations take a long time to bear fruit, even in the best of situations. In contrast, HP’s situation is one of the worst I have ever seen.”


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