HP Keeps Growing, But Is Big Blue Better?

Hewlett-Packard (NYSE: HPQ  ) is the twin brother IBM (NYSE: IBM  ) never knew it had.

Like Big Blue, HP makes most of its hay outside U.S. borders -- 65% of sales happened abroad in the first quarter, and Asia was the fastest-growing region. Both behemoths sport a fairly sector-agnostic mix of hardware, software, and services. IBM specializes in big-iron servers and enterprise-class business software. HP makes more than half of its sales from printers and consumer-level computer systems.

So when the market for computers, software, and support services accelerates, it takes both HP and IBM along on similar joyrides. However, IBM's chosen weapons sell at higher margins than HP's, so a broad market advance seems to benefit Big Blue more than it does HP. Noted thin-margin operator Dell (Nasdaq: DELL  ) actually matches HP's margin profile more closely than IBM does.

Not that HP is sitting on its hands, mind you. Its $31.2 billion in first-quarter sales translated into GAAP earnings of $0.96 per share, and it parlayed 8% stronger revenue year over year into 28% higher earnings. That's a sign of tight cost controls, especially since the low-margin personal systems division posted the strongest growth out of all HP divisions.

CEO Mark Hurd raised his 2010 guidance, saying that "HP is well-positioned to outperform the market." Well, maybe if you factor in the company's acquisitive bent. Its $2.7 billion buyout of networking veteran 3Com (Nasdaq: COMS  ) looks likely to close in the near future, boosting HP's sales by about $1.3 billion a year. That deal follows on the heels of the $13.9 billion EDS buyout, which created HP's enterprise services division. Buying their way to growth has worked well for Oracle (Nasdaq: ORCL  ) and Cisco Systems (Nasdaq: CSCO  ) -- both of which are also becoming veritable clones of IBM or HP -- and HP's coffers are well-stocked. We'll probably see more high-impact buyouts from HP.

But the fact that HP's sources of growth are either expensive or low-margin in nature makes me a skeptic when it comes to HP as an investment. IBM is cheaper (on a price-to-earnings basis) and pays a more generous dividend. IBM also boasts a one-star advantage in CAPS ratings, meaning I’m not alone in that assessment.

In my book, Big Blue beats HP hands down. What do you think, dear reader? Spill the beans in the comment box below.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Fool owns shares of Oracle. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On February 18, 2010, at 4:40 PM, bimmayute1 wrote:

    Former HP investor sees bleak future...

    Hey guys. I have been following HP for several years now starting with Carly Fiorina to the present.

    Up to a maybe one year ago, I was a HUGE advocate for investing in HP, mainly because I knew the management prowess of Mark Hurd and also thought that there was a lot of potential in the company which Carly Fiorina failed to unlock.

    Mark Hurd has been around for a while now, and he has done a good job cleaning up the mess and making the company more efficient. I still think he is the best manager in the IT industry (if not second best behind Larry Ellison).

    However, the playing field is certainly stacked against him at the moment. In every major business that HP is in, there are a ton of competitors out there ready to do battle. Whether you are talking about PCs, printing, software, consulting, servers etc.

    HP's biggest profit margin generator is "printing", which in my opinion is slowly becoming irrelevant. People just don't print as much anymore, especially with all the new gadgets floating around, not to mention the green movement. The new software tools they are developing to make a webpage more printer-friendly for visitors are not going to cut it. Photo printing (Snapfish) is also going to be a thing of the past. I know Hurd is trying his best to push into commercial printing, but it is still a stretch and I don't think it can get as high a margin in that space.

    PCs, HP's revenue generator is a waste of time and effort. The amount of capital used to get that small amount of margin isn't worth it. I don't care if HP is the largest PC seller in the world. I think IBM was damn smart in getting out of that business completely. There isn't much opportunity for margin improvement because EVERYBODY is now making PCs (including Nokia). A serious case of the commodity syndrome. Remember Microsoft makes the operating system, so there is limited opportunity for differentiation.

    HP consulting is where the future is and Mark knows it. Problem is, IBM dominates that space and will continue to do so. Dell, of all people, are also jumping in to the space. Oracle is already there (and pretty much dominates it in its own way). So HP is just arriving to the party and only god knows if they will have all the goods to deliver (like Oracle has with the Sun acquisition). Plus you have to consider if HP has all the patent and technology to be a very profitable consultant like IBM. Now you understand why HP is going after 3Com and EDS etc.

    Don't see much future in the hardware business. Sun makes better hardware (especially running Oracle software), and so does IBM.

    HP not the strongest in software period.

    So in summary, HP's bread and butter (printing) is slowly becoming irrelevant, they are weighed down by the PC division, and they are playing catchup in all other industries.

    Not saying Hurd can't do it, but it's going to be a tough and rocky road.

    If you haven't figured it out by now, I'm contemplating investing in Oracle. They will dominate the IT industry because they are already #1 in the database space (the most important piece), plus now they have the best of breed hardware (and some damn good software too) through Sun.

    What do you guys think?

  • Report this Comment On February 18, 2010, at 5:44 PM, seveninchruler wrote:

    The semiconductor chip is at the core of what we think us as technology. Computers, cell phones, iPods, medical equipment, avionics, etc. have only been possible because of the chip. The American chip industry has been damaged by the recent economic slowdown like most industries, but more importantly, the chip business in the United States has been in a slow fall for 30 years.

    In January global chip sales dropped by almost a third from the previous year, to $15.3 billion (Semiconductor Industry Association). Overinvestment in chip factories has resulted in steep losses of over the last 2 years. The chip business has been compared to farming. If too many farmers plant cotton, then the price of cotton will drop (supply and demand).

    The American chip industry, outside of Intel, is an endangered species. AT&T, Hewlett-Packard, and others are already gone from the field. Others, like Texas Instruments, have set a path for the eventual elimination of manufacturing. These companies have gone "fabless", meaning they will continue designing applications, but leave the process technology and manufacturing to someone else (most often to companies in Asia).

    The microprocessor market has been the exception, especially Intel. The microprocessor market has been controlled by Intel. It has been a kind of monopoly. But Intel, when operating outside the microprocessor arena (i.e. DRAM or Flash memory), has followed the general model.

    Intel has recently closed 3 factories (the industry calls them "Fabs", short for fabrication): one in Colorado, one in Oregon, and one in California. But Intel is building microprocessor fabs at the same time, currently building a factory in Phoenix and one in Israel. Intel is doing OK. Intel had over $12 billion of cash on hand at the end of 2008.

    In 1980, one of the pivotal events in the history of the chip industry, was IBM's selection of Intel to build the microprocessors for the IBM personal computers. IBM chose Intel over Motorola and Zilog (Zilog was founded by ex-Intel engineer Frederico Faggin, who invented the MOS process while at Fairchild).

    IBM insisted that Intel facilitate second sources for the microprocessors by allowing companies like AMD to alternatively manufacture the chips. Intel's wealth has been almost fully acquired because of their control of the personal computer. IBM ceded control of the personal computer away with this agreement, or more accurately, their failure to execute this agreement.

    ----------------------------------

    www.intelligentinvestingtips.com

  • Report this Comment On February 18, 2010, at 5:45 PM, seveninchruler wrote:

    The semiconductor chip is at the core of what we think us as technology. Computers, cell phones, iPods, medical equipment, avionics, etc. have only been possible because of the chip. The American chip industry has been damaged by the recent economic slowdown like most industries, but more importantly, the chip business in the United States has been in a slow fall for 30 years.

    In January global chip sales dropped by almost a third from the previous year, to $15.3 billion (Semiconductor Industry Association). Overinvestment in chip factories has resulted in steep losses of over the last 2 years. The chip business has been compared to farming. If too many farmers plant cotton, then the price of cotton will drop (supply and demand).

    The American chip industry, outside of Intel, is an endangered species. AT&T, Hewlett-Packard, and others are already gone from the field. Others, like Texas Instruments, have set a path for the eventual elimination of manufacturing. These companies have gone "fabless", meaning they will continue designing applications, but leave the process technology and manufacturing to someone else (most often to companies in Asia).

    The microprocessor market has been the exception, especially Intel. The microprocessor market has been controlled by Intel. It has been a kind of monopoly. But Intel, when operating outside the microprocessor arena (i.e. DRAM or Flash memory), has followed the general model.

    Intel has recently closed 3 factories (the industry calls them "Fabs", short for fabrication): one in Colorado, one in Oregon, and one in California. But Intel is building microprocessor fabs at the same time, currently building a factory in Phoenix and one in Israel. Intel is doing OK. Intel had over $12 billion of cash on hand at the end of 2008.

    In 1980, one of the pivotal events in the history of the chip industry, was IBM's selection of Intel to build the microprocessors for the IBM personal computers. IBM chose Intel over Motorola and Zilog (Zilog was founded by ex-Intel engineer Frederico Faggin, who invented the MOS process while at Fairchild).

    IBM insisted that Intel facilitate second sources for the microprocessors by allowing companies like AMD to alternatively manufacture the chips. Intel's wealth has been almost fully acquired because of their control of the personal computer. IBM ceded control of the personal computer away with this agreement, or more accurately, their failure to execute this agreement.

    ----------------------------------

    www.intelligentinvestingtips.com

  • Report this Comment On February 18, 2010, at 6:03 PM, 98analysis wrote:

    I agree with the analysis on printing. Personally, I rarely print because of the clutter it creates in my room.

  • Report this Comment On February 19, 2010, at 6:16 AM, RNML wrote:

    Re comments from bimmayute1 on February 18, 2010, at 4:40 PM, HP makes absolutely excellent hardware and backs it up with oustanding support services. Sun does not produce enough hardware to fund sustained innovation in product design.

  • Report this Comment On February 19, 2010, at 3:51 PM, grant224 wrote:

    "Re comments from bimmayute1 on February 18, 2010, at 4:40 PM, HP makes absolutely excellent hardware and backs it up with oustanding support services.Sun does not produce enough hardware to fund sustained innovation in product design. "

    I think he was referring more to the low profit margins (compared to "printing") achieved with those products and services- not questioning their quality.

    I also think Sun (ORCL) is in better shape than you think. Producing hardware may not be it's only potential funding source...

  • Report this Comment On February 19, 2010, at 3:51 PM, grant224 wrote:

    "Re comments from bimmayute1 on February 18, 2010, at 4:40 PM, HP makes absolutely excellent hardware and backs it up with oustanding support services.Sun does not produce enough hardware to fund sustained innovation in product design. "

    I think he was referring more to the low profit margins (compared to "printing") achieved with those products and services- not questioning their quality.

    I also think Sun (ORCL) is in better shape than you think. Producing hardware may not be it's only potential funding source...

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