The trials of HP in recent years have been so dramatic that even casual onlookers know the basic trajectory. Founded in 1939, the company prospered by pursuing "the HP way" based on integrity, teamwork and flexibility and launching a wide range of scientific components and devices. It went public in the 1950s and was an investment and technological legend even before the term 'Silicon Valley' was coined. In the 1980s when personal computers swept away all before them, HP's models never quite made the mainstream, but its printers were as indispensable as a Microsoft operating system. And as anyone who ever bought a laser toner or ink cartridge has reflected, the margins were ridiculous.
Opinion differs as to whether the rot set in the 1990s or later, but by 2002 when Carly Fiorina fought her board to spend $25bn on PC manufacturer Compaq, it was pretty clear the direction had changed. She was later sacked. Her successor spent $20bn on IT services operator EDS and several handheld gizmo manufacturers. He was sacked. His successor spent $11bn on UK-based Autonomy and said he would sell the PC division. He was sacked. And so we get to Meg Whitman. She said HP could not possibly sell its PC division and her predecessors had paid far too much for their acquisitions.
After all this, HP today has ended up with a big, profitable but zero growth printer business, an even bigger but distinctly less profitable PC business, a sensible servers and storage hardware business and a big consulting and outsourcing division which is profitable but not at the level justifying the acquisitions which have built it. That added up to a downtrending $120bn of sales last year and a downtrending margin of about 9 per cent, or say $9bn, this year before a torrent of exceptional costs. HP is capitalised at $28bn and has $9bn of net debt. That capitalises it at say four times operating earnings, which are falling.
For comparison, Apple's sales last year were $110bn having tripled in two years. Its margin was 31 per cent or say $34bn last year, rising to probably $40bn this year. If you ignore Apple's net cash of $100bn, it is capitalised at $500bn or 13 times operating earnings, which are rising.
Apple certainly will not keep up its recent cracking progress. It will not make $100bn in the near future. On the other hand HP could keep up its recent rake's progress. It's not going to make any more big bad acquisitions. But its personal computers could go from low profit to no profit and its printer operation could go from big profit to less profit. Do you find you're printing less these days?
And there, essentially, you have it. HP is in the hands of Meg Whitman who essentially built eBay into the business it is today but then spent an insane amount of money failing to get into politics. She has bitten the strategic bullet, including sacking so far 9 per cent of HP's astonishingly large workforce of 350,000. But she has never fixed up anything this size, this broken.
HP is not obviously a Kodak or a General Motors. Its main arteries are still functioning. Its balance sheet is OK. If it can make that consulting and outsourcing business hum, it could be quite cheerful. Autonomy was a pretty attractive business before HP got hold of it. The printer business will shrink but if it can morph its PCs into tablets it could have a hand worth playing. Its server business should be a core contributor to the cloud.
But it's not a buy until it shows these things are happening. The market capitalisation of $28bn is a long way above option money. It says Meg Whitman has a chance of pulling off the turnaround. That's about the best you could say for HP right now.
