HP Needs to Copy Kraft's and News Corp's Bold Moves

Hewlett-Packard (NYSE: HPQ  ) shares soared sky-high on Thursday thanks to a surprisingly solid second-quarter report. On Friday, HP threw its engines into reverse. The strongest Dow Jones (DJINDICES: ^DJI  ) component one day became the weakest of the next day.

Fellow Fool Dan Caplinger posits that HP's 2.5% drop is nothing but a pullback after Thursday's 17% dose of enthusiasm. That's certainly part of the picture, but I think there's more to this steep reversal.

I'm not convinced that HP's recent success is sustainable, and HP investors are slowly waking up to this uncomfortable idea. It's not a bucket of ice water to the face, but rather more of a sluggish, queasy morning after the earnings-induced party.

CEO Meg Whitman remains committed to HP's current strategy. This means keeping the company intact, rather than splitting it into two nimbler companies, while firing diluted blunderbuss shots at every market in sight. Separating into a consumer company and a business-class company would help each division double down on the opportunities that truly matter while dropping unprofitable lead weights as appropriate.

There's even a growing body of precedent for this kind of strategy. News Corp (NASDAQ: FOX  ) just announced its intention to split into separate news and entertainment businesses, letting investors support the 20th Century Fox or News sides of the company. This move will "unlock the true value of both companies and their distinct assets," says News Corp CEO Rupert Murdoch.

Last year saw Kraft Foods (NASDAQ: KRFT  ) refocus on grocery items while splitting off its snack-foods segment into brand-new ticker Mondelez (NASDAQ: MDLZ  ) . Again, the split inspired Kraft Foods CEO Tony Vernon to operate his half with "the spirit of a start-up and the soul of a powerhouse," while Mondelez is free to "unleash a global snacking powerhouse" that is "the world's greatest start-up." Neither Kraft nor Mondelez has the scale to stay on the Dow, but the company went ahead with the split anyway.

Since that game-changing event, Mondelez shares have largely tracked the Dow's performance, while Kraft shares more than doubled the Dow's returns. Maybe there's something to this "start-up spirit" talk after all.

KRFT Chart

KRFT data by YCharts.

Granted, all this big talk may not match the long-term reality, but wouldn't you agree that HP could use a shot of entrepreneurial spirit right now? The inveterate Silicon Valley giant would be better off ripping that page from the Kraft and News Corp playbooks, but Whitman prefers sticking to her guns.

I'm far from the only HP critic, even in the afterglow of Thursday's celebration. Powerhouse analyst house Goldman Sachs reiterated its "sell" rating on the stock, noting that while last quarter was impressive, "HP's businesses are facing even more distress than we originally anticipated, and we believe the company's short-term, restructuring-driven profit and cash flow recovery is unsustainable."

Short-term fixes to permanent problems. I rest my case.

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. HP's stock is surging, but does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor detour 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.


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  • Report this Comment On May 24, 2013, at 3:39 PM, PropioFurbo wrote:

    Hey Anders, keep plugging away bashing HP. If fools had headed your advice and not invested in HP they would have missed a golden opportunity to profit from HP's turnaround. And those that were foolish enough to short HP, well they've had their heads handed to them so far this year, haven't they?

  • Report this Comment On May 24, 2013, at 5:48 PM, Techlog wrote:

    I can compare HP with United States of America after Pearl Harbour. The pacific fleet was annilihated, and people saw a dark future. Many tough battle where fought, and then at Midway, the US fleet, completely outclassed on paper, won a decisive battle, decimating japanese aircraft carrier superiority. After that, nothing had stop the huge US manufacturing power & human ressources to fight a war. The Midway battle for HP is to keep investing in core technology and research. HP had built to date a major patent portefolio in nanotechnologies. This is the Midway battle. Now the goal is to use it's large manufacturing and subcontracting network ressources to put entirely new products on the market. Products so revolutionary that even future Apple devices will run on that technology. Yes, Apple with HP inside. Can you imagine this? As an exemple, cell phone that you don't have to recharge for a week!!!If you don't know about HP patents, you know nothing about HP.

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