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Is HP a Value Trap?

September 08, 2011 | About:
matsandalex

matsandalex

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Computer industry leader Hewlett-Packard (HPQ) reported horrific quarterly results in August. Unfortunately for HP investors like John Paulson, forward guidance was lowered further.

The question is whether HP is a value stock or a value trap?

First of all, HP’s consumer PC business continued to show weakness last quarter as it was down 17% year-over-year. The weakness on the consumer side of the business is not a big surprise to investors.

The reason the shares have been bludgeoned this year is that enterprise customers are also experiencing weakness. It is difficult to determine if this is HP specific or whether the problems at HP are simply because of broad macroeconomic problems.

During the conference call, HP CFO Cathy Lesjak said: “Looking forward, HP continues to be challenged by macro uncertainties that may impact each of our businesses, both consumer and commercial.” Areas of strength in past quarters (servers, storage, printer supplies) saw orders deteriorate in the most recent quarter. Reported sales growth from these areas was still healthy in the most recently reported quarter. Across ESSN (Enterprise server, storage and networking division) we are seeing a slower economic environment and expect below normal sequential growth going forward. While we remain well positioned in the fastest growing areas of the market, we expect ISS (industry standard servers) year-over-year growth to slow in the fourth quarter, driven by a very difficult prior year comparison and the slowing demand environment.”

Some analysts have blamed the HP weakness on Apple’s table/mobile strength. This is nonsensical because Apple has little influence on the enterprise sector. Walk into any government building and see how many Apple computers you see. Thus, the problems at HP are most likely largely the result of a recession that is about to engulf the global economy.

Another piece of HP news that rattled investors was the fact that HP announced it was buying Autonomy, the largest software company in the UK for $10.25 billion. Most tech analysts viewed this as an exorbitant price at over 10 times sales. Most analysts have little faith in HP CEO Leo Apotheker who now plans to focus the company more on software and services.

HP is an economically sensitive business as the global economy teeters on recession. The company is transitioning into a new area which shows that it is unfocused. One minute it wants to be the tablet king and the next minute, it shelves its money losing product and wants to dominate enterprise software and storage. Finally, HP has questionable leadership that is in acquisition mode which is always a dangerous combination.

Rating: 3.1/5 (12 votes)

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