Hewlett Packard (HPQ) racked up impressive profit gains during the tenure of Mark Hurd as CEO from 2005 to 2010. But the company stumbled in its first quarter under new CEO Leo Apotheker, and it’s not clear how strongly HP will recover.
With the stock down about 19 percent over the last year, HP may be an attractive play for value investors, but it’s no slam-dunk.
The company is mimicking the IBM model of expanding into a one-stop shop for information technology. With its purchase of EDS in 2008, HP dove headfirst into the IT services field. The company also is making a big play for cloud computing, which lets customers utilize applications and perform computing tasks over the Internet rather than their own servers.
But competition is heating up in integrated solutions. IBM is the market leader, and Cisco, Dell, and Oracle are joining HP in the hunt.
In March, Apotheker pledged that earnings would soar in the years ahead, and the company increased its dividend. But in its latest earnings report in February, HP cut its sales forecast for this year to a maximum of $131.5 billion, down from the $133.5 billion high end of its previous estimate.
Analysts surveyed by Bloomberg predict a sales increase of 3.7 percent in fiscal 2011 and 4.4 percent in 2012. That’s a far cry from the approximately 8 percent average yearly increases achieved under Hurd.
Sluggish demand for services and consumer products is holding HP back, and its gross profit margin of 24 percent pales in comparison to IBM’s 40 percent.
Goldman Sachs analyst Bill Shope rates HP shares a hold. “We were impressed with the new CEO's long-term vision, and agree with his view on the areas where HP needs to focus in coming years," he writes.
"Nevertheless, we still believe the company is underestimating the costs of its current transformation and the resulting risks to medium-term margin stability. In order to shift its portfolio towards higher-growth and higher-margin segments, HP will have to take share from category leaders such as Apple, IBM, Oracle, and Cisco."
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