HP, Dead or Just Resting?

HP, as the Hewlett Packard Company likes to be known, (NYSE: HPQ), is on its last legs, if you judge it by its stock price. It is selling for less than six times earnings. It has become a symbol of technological failure lately, mainly because of the failure of its tablet computer offering and its lack of presence in the smartphone market. Also, it announced it wanted to sell or spin off its personal computer (PC) business, but apparently no one with that kind of bucks wants to buy the division.

But suppose the pundits and investors arranging for a funeral are reading the symptoms wrong. In that case it possible this is a buying opportunity for those who get an accurate view of the situation. After all, a PE under 6 means trailing earnings are about 17% of the stock price. That strikes me, on the surface, as a much better deal than 2% annual returns on risky long term loans to the United States government.

The most solid evidence that things are not so bad are actual GAAP results from fiscal Q3 2011, as reported on August 18, 2011. True, revenue was up only 1% y/y, and while GAAP net earnings were $1.9 billion, up 9% y/y, non-GAAP net earnings were $2.3 billion, down 11.4% y/y.

A company with $1.9 billion in GAAP earnings in a quarter is not on death's doorstep. So the low stock price must be based on opinions about something more fundamental than mere profits: technology trends.

I have been around long enough to see a lot of companies go out of business, especially in the PC space. I know it can happen. Margins are brutal when differentiation from competitors is difficult. That is why IBM turned over its PC business to Lenovo. On the other hand, Lenovo has done quite well since then, so maybe IBM's strategy was not so brilliant.

The main theory is that tablets and smartphones are going to eat PCs, just like PCs ate up minicomputers back in the 1980s. To buy that argument you have to include servers in the PC category, because what PCs ate up was dumb terminals. Servers, based on technology similar to PCs, are what actually killed minicomputers.

Digging deep into history, recall that PDAs were going to replace PCs. Instead MP3 players replaced PDAs, because more people wanted to listen to music than wanted to carry around a tiny crippled business tool. HP was a leader in PDAs, and a failure in MP3 players, yet it did not die from the experience.

HP has several segments; the future does not look the same for each segment. The printer segment does not seem to be disappearing. The business hardware segment, excluding PCs, includes servers, enterprise-level storage, and other datacenter components like switches, routers, and the software needed to enable and manage racks of equipment. Because people are increasingly relying on mobile information, these datacenters, aka the cloud, continue to expand. Competition with IBM, Dell, Cisco, Oracle and many other companies is fierce, but so far HP has competed rather well. Services for enterprise computing are also a major source of revenue and profit.

So if the consumer PC division is seen as a weakness, the worst case scenario should be that it gets spun off. Stockholders get the enterprise and printer gravy in one tray and the consumer business in another.

If HP is making a mistake, it is not seeing the further possibilities of the PC business (with PC broadly defined). Every few years since the PC was born it has been declared to have all the computational power it needs. I have made that mistake myself. These days the new AMD A-series chips can run a pretty good game without the need for a discrete graphics card. They can put HD video on a big screen. The end of innovation must be near, except for smartphones. And tablets.

If you think PC innovation is coming to an end, you have not talked to the visionaries at Microsoft, or AMD, or even at Intel. Amazing things are just beginning to be computationally possible. A good example is the Kinect device for Xbox 360 games. There is no reason similar technology can't be attached to PCs running 60 inch displays. In fact, hackers are doing that already, with Microsoft even offering a software development kit (SDK) to help.

Yes, you will be able to wave your hand in the air, talk a bit, and do everything from altering an accounting spreadsheet to running a tractor to manipulating DNA from the comfort of your chair.

You are going to want the latest smartphone when you are on the road. But in your den or office, you are going to want a PC with a big screen, input devices more intuitive than touchscreens, and a hairy advanced processing unit to make it all work in real time.

If Leo Apotheker is too dull to see the potential of HP's PC division, it is still going to be profitable for the foreseeable future, even if it is just a commodity manufacturer of innovation spun elsewhere. A spin off suits me fine. Wish I would run it, wish I could own it. In addition I would get shares of the enterprise segment, a gold mine in itself.

Wait, I can own a piece of it. That is the great thing about stocks, you don't have to buy the whole company all at once.

Disclaimer: As I write this I own no HPQ, but it is on my wish list to buy. I do own AMD stock. I do occasional subcontracted work for Microsoft. I also own stock an HP competitor, SGI, that specializes in technical computing.

Marvell Releases 10-Q with Fiscal Q1 2008 Results

Marvell released a 10-Q giving its results for the quarter ending April 28, 2007 (Fiscal Q1 2008) yesterday. In the press release of Q1 results, and at the analyst conference (See my summary), only the revenues had been reported due to the ongoing stock option accounting restatement. The filing of the 10-Q confirms that the process is complete and accounting issues have been resolved.

If you have been following the Marvell story the 10-Q confirms what has been broadly guessed. Revenues were $635 million, up 2% sequentially from $622 million in Q4 2007 and up 22% from $521.2 million for fiscal Q1 2007. This annual increase of revenues was largely due to two major acquisitions, Intel's XScale division and Avago, a specialist in chips for printers.

Also mainly due to the acquisitions earnings swung from a healthy profit of $77.6 million year-earlier to a substantial loss of $52.9 million. This was expected because the larger acquisition, XScale, was losing money when acquired and is not expected to become accretive to earnings until calendar 2008.

Cash from operations was $54 million, up from $47 million year-earlier. Contrasting this with the GAAP earnings shows that many of the charges against earnings were non-cash.

The real question is, what does the future look like? The XScale processors are meant to compete in the high-end cell phone market. They were not chosen by Apple for the iPhone, though at least one chip by Marvell was. However, even under Intel the revenues from XScale were growing at a good pace. By combining the XScale processor with other highly-regarded Marvell analog and digital components, it is possible (but not guaranteed) that traction will be good. By increasing XScale revenues and decreasing production costs through outsourcing, Marvell expects to make the XScale business profitable some time next year.

XScale is not the only trick Marvell has to pull off. It did so well in creating chips that go in disk drives that it seems unlikely that it can gain much more market share there, and that market itself is not growing quickly. So Marvell is pressed by the need to innovate, winning share in other markets and entering new markets. One area of optimism is chips to improve performance of high-definition displays.

The main danger for Marvell, other than a macroeconomic downturn, is failure to expand XScale revenue. For now Intel is producing the processors and Marvell is obligated to buy them even if it finds itself unable to sell them.

More data:

Marvell investor relations page
My Marvell (MRVL) page

Me and HP

I am going to begin summarizing HP analyst conferences. The next conference is not until February 20th, but I've been thinking about my relationship with HP [stock symbol: HPQ].

HP used to be Hewlett-Packard after the last names of the two men who formed the company in 1939 long before I was born. The company did not incorporate until 1947, a year when its revenues approached $1 million.

I first heard of Hewlett-Packard in the mid-1970s, in college, when hand-held calculators first became popular. I have never owned one made by HP; right now I have a TI and a Casio that are put to good use. The thing about HP was that it was not a consumer-goods producer, but an engineering firm. Early on it seemed like it would miss out on the PC revolution, but of course now it is a big name in personal computers, servers, storage and related things. It spun off Agilent a few years back, a stock I briefly owned. I also owned HP from 12/09/2003 until 2/2/2004 and made a good return on it.

I am working, typing in this blog entry, on an HP Pavillion a200y that I bought several years back for some experimenting I was doing with black boxes. It is my general purpose computer now because I consider it expendable. My newer computer is from Systemax, customized, runs on an AMD dual-core 64 bit processor, and is just waiting to install Microsoft Vista. At that point the HP will be used for Linux experiments.

On my quality scale of computers I have owned, the a200y is pretty near the bottom. I won't go into its problems but they seem to be mostly related to HP using overly cheap components. The result was a ridiculously low price, and I've certainly gotten my money's worth of use out of it. But it brings up the problem faced by Dell as well as HP and other computer vendors: how much can you compete on price before you are using lousy components that ruin your reputation for quality?

But I also have a HP LaserJet 1020 which was ridiculously inexpensive to buy and has performed great. As a small, black and white laser printer I can highly recommend it. Printers and supplies for them are a big part of HP's current success.

HP stock closed today at $42.20, which makes me realize I would have been better off as a long-term investor. But seeing into the past is a lot easier than seeing into the future.

According to NASDAQ HPQ has a price-earnings (PE) ratio of 19.36, which inverts to a 5.17% return. That is very reasonable if you expect HP to chug along for the next 10 or 20 years. The dividend of $0.32 per share works out to a 0.76% return. So the hope of HP investors is clearly that they will get price-appreciation, not just the paltry dividend.

I see no reason for someone like me to buy HP stock right now, but who knows, maybe if I listen to the analyst conference I may understand it better and change my mind. Or not.

To see the list of companies that I follow, just click here.