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Zombie HP's Quest for Brains Ends, Badly

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Shares of Hewlett-Packard (NYSE: HPQ  ) were down more than 20% yesterday, 10 months after I told investors to short the stock. Thursday night, the world's top computer maker reduced guidance and announced plans to exit the PC and mobile-device business.

"Mark Hurd is the lucky one. If you're buying shares of [HP] right now, you're unlikely to escape losses owning this scream-worthy stock," I wrote in profiling the stock for our annual Halloween special. Shares of HP have underperformed the market by more than 40% since.


I'd love to have been wrong about this. Good people are going to get hurt. Talented men and women will lose jobs. Investors will lose savings as HP loses face. Almost no one gains from this. Except, of course, for Apple (Nasdaq: AAPL  ) .

The remains of HP's days as a PC company
More on all that in a minute. First, let's review the numbers. Revenue rose 1% to $31.2 billion in HP's fiscal third quarter, about in line with estimates, while non-GAAP earnings rose 2% to $1.10 a share. Analysts had been expecting $1.09 a share of adjusted earnings. That's the good news. The bad? HP reduced guidance for both the fourth quarter and full year.

In Q4, management  expects $1.12 to $1.16 in adjusted earnings on $32.1 to $32.5 billion in revenue. For all of 2011, HP expects $4.82 to $4.86 in adjusted profit on $127.2 billion to $127.6 billion in revenue.

Neither estimate came close to meeting Wall Street's projections. Analysts had been calling for $1.31 a share in Q4 profit on $34.04 billion in revenue and $5.01 a share in full-year earnings on $129.15 billion in revenue, according to data compiled by Yahoo! Finance.

Sagging sales for the PC and devices group -- the division HP calls "Personal Systems" -- was at least partially to blame. Revenue from that unit fell 3%. Consumer Client revenue declined 17%, most likely because of the rise of the iPad and iPhone. Or at least that's how CEO Leo Apotheker made it sound in his comments to analysts during the earnings call.

"Secular trends impacting our PSG business as consumers are changing the use of the PC. The tablet effect is real, and sales of the TouchPad are not meeting our expectations," he said. Right. Secular trends such as Apple's sales of 5 million more iPhones than anyone expected last quarter.

Apotheker would go on to explain how a sale of Personal Systems assets -- including the WebOS platform acquired from Palm and the entire PC business -- would help to sharpen HP's focus on the cloud and technologies for accessing services from "any type of device."

HP's post-PC era
Why not just rename HP after Apotheker's former employer, SAP (NYSE: SAP  ) ? We could call it HP-SAP. Or SAP Enterprise. Either way, in exiting the consumer business, Apotheker is returning to his roots -- and aiming for Oracle (Nasdaq: ORCL  ) and IBM (NYSE: IBM  ) in the process.

Again, consider Apotheker's own comments. Enabling access to any type of device means selling servers, storage, database technology, management software, and (as I'm sure Apotheker would hope) more than a dollop of professional services. HP offers all this and more today, and it plans to further beef up its back-office offerings with a $10.25 billion bid for Autonomy, a U.K.-based provider of software for optimizing data infrastructures.

Less brains!
When HP bid for Palm last April, I called it one of the worst deals I'd ever seen. In October, I predicted that HP's inability to glean value from the acquisition would take a toll on shareholders. The company had become a corporate zombie, I contended, eating brains for no other reason than to eat brains. Today we're seeing the effects of its indigestion.

To be fair, Apotheker is probably right to solicit bids for WebOS and Palm. A recent rush to acquire patents could value Palm's own intellectual property at a multiple to the $1.2 billion HP paid. Consider Google (Nasdaq: GOOG  ) , which has committed what amounts to an $8 billion premium (over book value) for access to Motorola Mobility's patents.

Yet there's a huge difference between selling off underperforming assets and cultivating high-performing assets in the sort of competitive environment in which HP operates. The former is a guarantee; the latter anything but. Or as Apotheker put it during the company's earnings call:

The transformation we are undertaking will take several quarters to fully resolve. I don't take this action lightly. I know our investors don't like being in this position, and neither do I. I feel their pain. But as CEO, I believe in transparency about what we are facing and be clear on the decisive things we are doing now about it.

There you have it. Zombie HP may be dead, but the nightmare is just beginning. Do you agree? Disagree? Weigh in using the comments box below. And if you're in the mood for more stock ideas, try this free video. You'll walk away with a better understanding of the cloud-computing revolution that HP is hoping to profit from, as well as a winning pick from our Motley Fool Rule Breakers scorecard. Start watching now -- it's 100% free!

Fool contributorTim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple, Google, IBM, and Oracle at the time of publication. Check out Tim'sportfolio holdings andFoolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insightsdelivered directly to your RSS reader.

The Motley Fool owns shares of Google, IBM, Oracle, and Apple.Motley Fool newsletter services have recommended buying shares of Apple and Google and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

Read/Post Comments (6) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2011, at 5:15 PM, jdg143 wrote:

    I wish someone had told them this before they ate up Compaq. Or told Compaq before they ate DEC.

  • Report this Comment On August 20, 2011, at 11:14 PM, Joshua1229 wrote:

    It's important to look at management's competency. Think about the skill of management when they manage to destroy a $1.2 bil business, and then turn around and overpay $10 bil in another. What is the chances they will do that right?

  • Report this Comment On August 21, 2011, at 2:46 AM, Melaschasm wrote:

    HP/WebOs isn't a significant player in mobile, so I don't think that part of the announcement is hurting HP. In fact trying to sell WebOs patents at the current high price is likely going to generate some nice profits.

    The big news is HP leaving the PC/Laptop business. Considering the focus on mobile computing right now I doubt the PC/Laptop business is going to fetch a big premium. In this case I prefer Dell's strategy of collecting whatever profits they can, while minimizing investments in the PC/Laptop business.

    It seems like a spin off would make more sense than a sale, since HP is one of the biggest PC/Laptop companies. I will probably red thumb whatever company buys HP's PC/Laptop business. l

  • Report this Comment On August 21, 2011, at 5:10 AM, MF212 wrote:

    I guess instead of shedding PC business should shed CEO & others with similar ideas.

  • Report this Comment On August 21, 2011, at 5:58 AM, marv08 wrote:

    After announcing the restructuring, IBM needed almost another 5 years to climb above their previous (1999) high. Do I know what this market will be like in 5 years, do I know if HP has the skills and structures in place to catch up in enterprise software, cloud computing and other hot disciplines? No, I don't.

    There is just this pretty solid feeling, that Apotheker is no second Lou Gerstner, and that while some elephants may be able to dance, most are not. And if they do not move fast, we have certainly not seen the lowest evaluation yet.

  • Report this Comment On August 23, 2011, at 12:50 AM, hiddenflem wrote:

    I wonder what effect dumping so many $99 and $150 tablets on the market will have on Apple's ipad sales this quarter (if any). Seems like everyone I know was after one of those HP touchpads. I'll bet they could do brisk business in accessories for a couple quarters if they wanted to...

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