Why HP Didn't Join Today's Dow Party

You can't keep a good stock down. On the other hand, you can't keep a bad stock up forever.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is up 56 points this afternoon, breaking a three-day streak of negative returns. House Speaker John Boehner finally seems ready to cut a deal on the fiscal cliff, and the markets are breathing a collective sigh of relief.

But the rising tide didn't lift all boats. In particular, fallen technology giant Hewlett-Packard (NYSE: HPQ  ) failed to follow its Dow peers in a positive trajectory. The stock fell as much as 4% instead, making it the biggest Dow loser today by far.

Hewlett-Packard has been riding a wave of optimism lately -- and for no particularly good reason.

HPQ Chart

HPQ data by YCharts.

In all fairness, HP's drop today is no more substantial than the gains leading up to it. The negative catalyst here is a skeptical research note from Deutsche Bank, which says that breaking HP up into a handful of smaller, nimbler companies might not create any value after all.

Deutsche analyst Chris Whitmore believes that a unified HP comes with synergies and economies of scale that would be hard to replicate with separate consumer and enterprise businesses. If corporate raider Carl Icahn pushes the company into a forced breakup, Whitmore sees him actively destroying shareholder value.

Does Whitmore have his stuff together? I can't find any evidence to the contrary.

The bank has an active "sell" rating on HP with a downright painful $10 price target. Our CAPS system shows that Deutsche has a firm grasp on the computing industry, having scored a solid 414 net points in that sector. Most of that score comes from a long-standing "buy" rating on Apple (NASDAQ: AAPL  ) , mitigated by an equally long-term but far less successful "buy" on system builder Dell (UNKNOWN: DELL.DL  ) .

I agree that HP is in dire straits, but I disagree with Whitmore's analysis of a potential breakup. The computing legend would be far better off spinning out the consumer business and doubling down on the enterprise space. Mobile computing has forever changed the face of the IT industry, and HP needs to throw its entire weight behind the enterprise end of the remaining opportunity. Consumer PCs and printers can be left to die as a separate brand or perhaps sold off to some low-cost hardware outfit from China or Taiwan.

So I might not endorse Deutsche Bank's entire thesis on HP, but I do agree with the final outcome: a long and painful decline.

The massive wave of mobile computing has done much to unseat the major players in the PC market, including venerable technology names like Hewlett-Packard. However, HP is rapidly shifting its strategy under the new leadership of CEO Meg Whitman. But does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor blip on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.


Read/Post Comments (4) | Recommend This Article (4)

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  • Report this Comment On December 17, 2012, at 2:22 PM, PRODOD wrote:

    DB has it right on HPQ: No mobile & No tablet means slow death in IT. And it helps --not at all-- if you happen to waste $20 or $30 Billion on worthless buyouts like Palm, Compaq & Autonomy.

  • Report this Comment On December 17, 2012, at 3:12 PM, techy46 wrote:

    "I agree that HP is in dire straits, but I disagree with Whitmore's analysis of a potential breakup. The computing legend would be far better off spinning out the consumer business and doubling down on the enterprise space. Mobile computing has forever changed the face of the IT industry, and HP needs to throw its entire weight behind the enterprise end of the remaining opportunity,."

    Bad analysis. HP and Dell, like Microsoft, are a very successful enterprise IT suppliers that can spin off products for the less advanced but demanding consumer technology sector based on Microsoft's newly released Windows 8 ecosystem.

  • Report this Comment On December 17, 2012, at 3:15 PM, techy46 wrote:

    @PRODOD HP Elitetab is a mobile tablet and it will be the first of many successful Windows 8 mobile devices. That's one if the reason Apple's adjusting to a more realistic future EPS and PS.

  • Report this Comment On December 17, 2012, at 3:58 PM, PRODOD wrote:

    Techy46 - To the extent that Widows8 has an impact, I do not expect it to be expressed through the sale of "Elitetab" (or any other late to the party HP offering). IMO, the more interesting question for AAPL is whether they will be impacted by MSFT & GOOG entry into the pc hardware business which will also provide additional competition for HP.

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