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Some Views on HP and Apotheker


VAL9000
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The HP board and Apotheker are catching heat from all sides. Nothing positive being said in these three opinion pieces:

 

Financial Times: "HP should have avoided a big bang"

http://www.ft.com/intl/cms/s/0/f68ef02a-ce3b-11e0-99ec-00144feabdc0.html#axzz1WQCgToj9

 

Wall Street Journal: "H-P's One-Year Plan"

http://online.wsj.com/article/SB10001424053111904787404576535211589514334.html

 

New York Times: "For Seamless Transitions, Don’t Look to Hewlett"

http://www.nytimes.com/2011/08/27/business/for-seamless-transitions-at-the-top-dont-consult-hewlett-packard.html?_r=1&scp=2&sq=apotheker&st=cse

 

 

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Val9000 - HPQ decisions might work out fine in long term but the best capital allocation decision would have been to continue buying their shares at bargain price. In fact their current decision will work out only if everything goes well and still I think it's bit of a stretch. They just had to make simple decision which would have produced almost guaranteed results.

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rranjan, I think you're probably right about that.  But since they're not doing that and the stock got slaughtered, is HPQ a good deal today at 6.1 P/E?  That's remarkably cheap. 

 

The PC business (PSG) is responsible for $2bn operating profit and $40bn revenue.  Extracting that and putting a market price on it, that business group is worth at least twice as much as Lenovo ($300mm profit on $20bn revenue).  Lenovo also does phones so it's not a direct comparison, but the numbers work out ok.  Lenovo trades for 6.5bn, so let's say PSG will sell for a conservative $12bn (that's a P/E of about 8, in line with all of HPQ last month).

 

The Autonomy deal is priced at $10bn and will bring in about $350mm in operating profit.

 

So, adjusting for these two transactions, earnings = ($12,000 + $350 - $2,000) = $10,350, net cash goes up by $2bn (PSG - Autonomy).  After tax earnings are now roughly $8,280.  This is now a P/E of about 6.6.  Plus you get an extra $2bn cash on the books.

 

A P/E of 6.6 is a pretty significant discount to future earnings power, wouldn't you say?  To achieve a P/E similar to IBM or Oracle (14-16), either the earnings would have to drop by 50% and the price remain the same, or the price would have to double.

 

Just some food for thought...  (And I can't resist a good valuation discussion :D)

 

 

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rranjan, I think you're probably right about that.  But since they're not doing that and the stock got slaughtered, is HPQ a good deal today at 6.1 P/E?  That's remarkably cheap. 

 

They have been tracking for non-GAAP earnings in excess of $5 in FY11.  And management continues to claim $7 in 2014.

 

Will they make deals that will jeopardize the EPS targets they are promising?  In the end, they will be graded on only one thing.

 

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HP's definitely cheap, but I don't have enough confidence in the integrity, strategic vision, and capital allocation skills of current management to even consider investing, even if it was half the current price. But that's just my own checklist... Doesn't mean it won't make a lot of money to people buying at these levels.

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rranjan, I think you're probably right about that.  But since they're not doing that and the stock got slaughtered, is HPQ a good deal today at 6.1 P/E?  That's remarkably cheap. 

 

They have been tracking for non-GAAP earnings in excess of $5 in FY11.  And management continues to claim $7 in 2014.

 

Will they make deals that will jeopardize the EPS targets they are promising?  In the end, they will be graded on only one thing.

 

Eric - Well, down the line they might use these changes as an excuse if they can not reach the target in timely fashion. They could have easily reached the target without doing anything different.

 

VAL9000 - Yes, HPQ is cheap and there is no doubt about it. HPQ price dropped more than what they paid for Autonomy. Infact I added some more around $23 to my small initial position. Management does not instill confidence in me to make it very large position otherwise I would have added substantially. Still it's cheap.

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rranjan, I think you're probably right about that.  But since they're not doing that and the stock got slaughtered, is HPQ a good deal today at 6.1 P/E?  That's remarkably cheap. 

 

They have been tracking for non-GAAP earnings in excess of $5 in FY11.  And management continues to claim $7 in 2014.

 

Will they make deals that will jeopardize the EPS targets they are promising?  In the end, they will be graded on only one thing.

 

I did not find any reference to the 2014 $7 EPS target in the Q3 Presentation or Conf Call. Given that they are making so many changes, management has a good case for saying that the conditions have changed so that the EPS target is not valid anymore - I have a nagging suspicion they made all these changes to avoid meeting the $7 target.

 

Vinod

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  • 4 weeks later...

Anyone on the board sold HPQ because of recent developments? Just curious...

 

I bought on August 19 after all the bad news that came out regarding the quarterly miss and the Autonomy announcement.  I sold yesterday at breakeven because of 2 things:

 

1.  The thesis changes (and not necessarily for the better) with Whitman elevated to CEO, and continued uncertainty regarding the disposition of the PC business and Autonomy acquisition.  Basically, I'm not sure what this company is becoming, and with Whitman and the same BOD (Andreesen terrifies me, for instance) running the show, it's reasonable to think additional value could be destroyed.

 

2.  Better deals became available in the interim.

 

Frankly, it's probably not a bad buy right now, I just think there are better opportunities.

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Frankly, it's probably not a bad buy right now, I just think there are better opportunities.

 

Buying at the point of maximum pessimism, possibly.  I don't own it and haven't given it serious thought, but can a stock or company be more unloved than HP right now? 

 

Some discussion of this on Fast Money last night (my secret vice :P), and they mentioned that the whole BOD is up for re-election this year.  So, an activist could come in and make serious changes pretty quickly with a little effort. 

 

Obviously, it looks cheap based on the financials, but it's such a clusterf**k right now that it would be hard to pull the trigger.

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Anyone on the board sold HPQ because of recent developments? Just curious...

 

We sold out in early September and this is what we told our investors:

 

"The biggest percentage decliner in the month (August) was Hewlett Packard (HPQ), which fell 26%.  Thankfully it wasn’t a large position, but it was and is a painful reminder of what Warren Buffett once said, “I try to buy stock in businesses that are so wonderful that an idiot can run them, because sooner or later one will.”  Well, apparently at HP one is, and unfortunately we didn’t recognize that before we purchased.  The company’s decisions in the last month were “less than wise,” to phrase it in a manner my mother would approve of.

 

We generally do not want to own investments that are cheap yet being managed by people of questionable ability.  Worrying about whether the strength of the business, or the weaknesses of management, will win out is unnecessarily stressful.  We prefer investments where the central question is, “The stock is cheap and management is solid, how long until the market recognizes this?”  It is much easier to sleep at night with those kinds of businesses in the portfolio." 

 

 

Obviously the problems at HPQ involve the Board as well, so replacing Apotheker doesn't immediately solve their problems, but dang it is cheap based on earnings.  Good things happen when you pay under 5 times earnings for a business that can continue to be profitable.  I am tempted to get back in.         

 

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