HPQ Q2A– Slash and burn.

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No strategy means no recovery.

  • Hewlett Packard reported Q2 14A results earlier than expected as it announced another 11,000-16,000 jobs are to go on top of the 34,000 already announced.
  • Revenues and EPS were $27.3bn / $0.88 compared to estimates of $27.4bn / $0.88.
  • This is the second quarter of flat YoY revenues which is reasonable performance given the weakness in the PC market but it is not enough.
  • HPQ wants to become a growth company again and in this vein it has decided to trim another 11,000-16,000 jobs.
  • This will have the effect of providing a one-time boost to EPS as costs fall but cutting resources also runs the risk of reducing revenues.
  • The problem with HPQ is very simple:
  • The company wants to grow but has absolutely no idea how it is going to achieve that.
  • Cutting more jobs is not the answer and looks to me to be a knee jerk reaction in response to shareholder demands for management action.
  • HPQ has some good businesses but they need to be updated so that they can evolve with the changing needs of the market.
  • Unfortunately HPQ seems to have no idea what to do and is standing paralysed in the headlights of a changing market.
  • Leo Apotheker had many faults but at least he had a strategy for where HPQ needed to go to find growth.
  • HPQ’s competitors are not standing still and there are very real risks that market share is lost as nimble and ambitious competitors take ever larger bites out of HPQ.
  • Meg has stabilised the ship but now she must decide upon an ambitious strategy to take HPQ forward.
  • Without a strategy, HPQ will start to lose market share causing revenue declines over time.
  • The time to decide is now as slash and burn will not provide growth.
  • Until there is some decisiveness from management, all the risk in the shares is to the downside.

 

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.