At its recent investor summit, Hewlett-Packard
Instead, HP encountered skepticism. It's targeting non-GAAP EPS growth of more than 11% annualized through fiscal 2014, similar to IBM's target through 2015. With the dividend increase, HP's forward yield is 1.1%, bringing it closer to IBM's 1.6%.
HP's lower yield isn't enough to explain the difference in the two companies' P/E ratios. HP is trading at a P/E of 11.0, a 21% discount to IBM’s 13.9. It's also below Dell's
HP became a stock-market darling under the stewardship of recently departed CEO Mark Hurd. Some investors believe Hurd would have continued driving strong EPS growth. They sold the stock on news of his departure. Others think Hurd's cost-cutting was largely played out and HP fell behind the technology curve.
HP "used to be a very inventive company"
It didn't help when IBM CEO Sam Palmisano unleashed a rare criticism last September, saying HP overpaid to acquire 3PAR but had no choice because Hurd had cut R&D too deeply. Palmisano also said he wasn't too concerned about competition from HP while praising rival Oracle
More recently, HP CFO Cathie Lesjak confessed during the Q&A session at the investor summit that HP's view of the PC market had fundamentally changed -- for the worse.
Plan the work
Investor days focus on strategy. HP outlined its plan to grow revenue in the mid-single-digits, at or above the market, and use share buybacks and margin expansion to boost EPS growth in the double digits over the next few years.
The plan makes sense. But HP is coming from behind in technologies such as cloud computing and tablets. More importantly, with a new CEO and a shift in approach, HP's ability to execute is an open question.
HP's plan has a lot in common with IBM's:
- HP plans on a "growth focus," i.e., growth geographies and new products and services in both its core portfolio and adjoining areas.
- Management plans to use acquisitions to improve revenue growth and product mix. Notably, CEO Leo Apotheker stated he didn't plan "big splash" acquisitions -- e.g., a large company such as his former employer SAP.
- HP plans to improve margins by shifting to a richer mix of products and services and by cutting costs through "operational excellence." During Q&A, management said it expects operating margins to expand more than gross margins -- an indication that there's still a big focus on cost cutting.
Management noted that HP has a unique set of strengths in both enterprise and consumer IT. Good point, but HP is an also-ran behind IBM in enterprise IT and also behind Apple, which not only maintains a dominant share of smartphones profits but is also surpassing HP in computer shipment growth rates in consumer IT.
Can zebras change their stripes?
The company discussed a three-year training program to upgrade its solution-selling skills. This isn't HP's first effort along these lines, suggesting that previous efforts have fallen short. That said, this effort seems more thorough, and HP said it is seeing positive results one year into the program.
Perhaps more importantly, HP is changing sales compensation and incentives to be more outcomes-based. This approach, when well designed and implemented, has proved to be highly effective elsewhere in the industry.
Software is a key focus of HP's acquisition efforts. Again, this is something the company has been discussing for years … and software accounts for a mere 3% of revenue. Management didn't offer any specifics as to why investors might hope for improvement on this front, although the new CEO's software background could help.
Operational excellence was cited as a reason to expect margin improvement. HP made great strides here under CEO Mark Hurd. Yet recently it seems that cost-cutting may have backfired. Missteps in China and poor PC tech-support ratings are examples.
Finally, HP touted its new TouchPad tablet and webOS, including a new developer environment. The demo was compelling, and the ease with which HP says developers can now port other tablet apps to the TouchPad turned heads, but HP is late to the party, was vague about webOS on the PC, and lacks Apple's marketing savvy. Failure is an option.
HP's strategy makes sense, but the company is playing catch-up and execution is an open question. It will probably be at least several quarters before the stock starts to really perform.
More on Hewlett-Packard:
- HP: Following to Where the Puck Will Be
- HP's "Softer Side" Strategy: Sensible, but Not Enough
- Fear of the Future Outweighs HP's Great Quarter
Follow all of the Fool's coverage of HP by adding it to your personalized watchlist.
Fool contributor Cindy Johnson thinks HP has lots of potential, but she owns no shares in any security in this story. Apple is a Motley Fool Stock Advisor recommendation. The Fool has written puts on Apple, and Motley Fool Options has recommended a bull call spread position on Apple. The Fool owns shares of Apple, IBM, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.