It is always interesting how quickly the investor community can
turn its back on a company. Technology giant
has seen its support wither after its CEO Mark Hurd resigned over
questionable behavior earlier this month. HP's stock has cratered
nearly 20%, from above $46 to around $38 per share, and all of the
sudden investors insist that HP has lost its way. The loss of Hurd
is definitely a negative, but should the tables be turning on HP
this dramatically already?
Fueling that argument is the news this week that HP decided to
enter a bidding war with
, a small data storage company. After initially being courted by
four companies, Dell and HP were the finalists to acquire 3Par but
HP had been previously unwilling to outbid Dell's $18 per share
offer. However, after Dell and 3Par announced the deal HP decided
to bid $24 and try to steal it from their competitor. Sporadic
behavior on HP's part? It sure seems like it, as the critics were
quick to point out, but maybe HP simply had a change of heart.
Maybe Mark Hurd was against a higher offer and now that he is gone
top management at HP decided they really should acquire the
company. Who knows.
What we do know, however, is that HP has lost its CEO and is now
willing to pay at least $1.6 billion to fill out its product line.
Are these actions worth a nearly 20% hit to HP's stock price? Given
that HP shares were cheap to being with, I think the sell-off is
overdone, as is the bearish sentiment toward the company all of the
sudden. At $38, HP stock trades at merely 8.5x fiscal 2010 earnings
estimates (there are only two months left in its fiscal year, so
readers need not complain that I am failing to use trailing
earnings, which would make the P/E ratio 10.7). And yes, using 2011
estimates of 11% profit growth (to $5 per share), HP's forward P/E
stands at just 7.7 times.
The risks here appear to be both obvious and less than dramatic.
Could the absence of Mark Hurd send the company into an operational
tailspin which would reduce market share and hurt profits?
Possible, but unlikely. Hurd's top lieutenants remain at the
company and are very likely to continue the management style and
game plan he has had in place for several years.
Could overpaying for 3Par hurt the company's finances
dramatically? No chance, as HP has cash on hand of $14.7
Could Dell adding 3Par to its arsenal materially cut into HP's
business? Unlikely. 3Par generates only about $200 million in
annual sales; a drop in the bucket for a company the size of Dell
($60 billion in sales) or HP ($125 billion in sales annually).
Could the empty CEO job cost HP some customers? Unlikely. As a
CTO, would you switch vendors if you have had good experiences in
the past, simply because the company's previous CEO allegedly
charged personal expenses to the company in what could have been an
attempt to woo a female contractor? You would probably agree with
me that giving him the boot should suffice.
To me it is pretty clear that HP's stock is getting unfairly
punished lately. As a long term value opportunity, I think it looks
Long shares of HPQ at the time of writing, but positions may change
at any time.
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