HPQ Q3 – Home to roost

The fundamental flaw in HPQ is laid bare.

• Things have been looking better at HPQ in terms of corporate governance and cost control but Q3 results show that it is time to address the real problem: The PC business.
• Q3 revenues / EPS were in line at $27.2bn / $0.86 compared to forecasts of $27.3bn / $0.87.
• However, forecasts were poor with the expectation of growth in 2013 compared to 2012 rescinded and FY13 EPS expected at $3.53-$3.57.
• Although the mid-point ($3.55) remains the same, the street was hoping for better with a consensus estimate of $3.57.
• The shares were off 8% in after-hours trading.
• The main problem was personal systems where revenues declined by 11% (consumer down 22% and commercial down 3%) and Enterprise where revenues fell by 9%.
• Compared to Dell and other PC makers / Enterprise suppliers these are very poor results and share is being lost.
• This is the heart of the problem and HPQ currently seems to have no clue how to turn these businesses around.
• Changing directors and shuffling management is a good start but it is time to address the real problem.
• The issue that HPQ faces in its PC business is exactly the same as Dell: the computing device market is now driven by form factor, touch and innovation.
• This requires R&D of which HPQ has very little given that the PC business has been a commodity for years.
• Hence it must make a decision.
• Either invest substantially to bring HPQ’s PC’s into line with market demands or sell it to someone who will.
• While the company procrastinates, the business will shrink along with HPQ’s options to become a growth company once again.
• HPQ is cheap but deservedly so.
• I would look at Samsung, Asustek or Microsoft as ways to have exposure to a bottoming of the PC market (see here).