There are a couple of items in the news recently that I think deserve a little bit more attention.
One revolves around the dismissal of charges against Hewlett Packard's (NYSE: HPQ) ex-chairwoman, Patricia Dunn.
The other revolves around Wal-Mart's (NYSE: WMT) possible foray into the mortgage origination business.
The good news for Hewlett Packard is that a California judge dropped all identity theft and fraud charges against its ex Chairwoman, Patricia Dunn in conjunction with the ongoing investigation into the company's corporate spying scandal.
In addition, three others (Kevin Hunsaker, HP's former ethics chief, and two private investigators, Ronald DeLia and Matthew DePante) pleaded no contest to misdemeanor charges of fraudulent wire communications charges that were levied against them. In return for their pleas they will receive no jail time.
So why is this good news?
While I kind of wanted to see some sort of punishment, it is still good in the sense that HP is now one step closer to putting this ugly chapter behind them.
And although these folks might still face federal charges, the abrupt ending to the state's case suggests that perhaps the evidence against these folks wasn't too strong to begin with. My sense is that the Feds will probably have an equally tough time prosecuting these individuals.
By extension because the California court essentially dropped the case, that will also give less ammunition to the plaintiff attorneys that are sure to pop up and file shareholder suits claiming that the scandal led to their client's losses in the stock market. Long story short, the fact that this saga is nearing an end is really good news for the common shareholder.
The Bottom Line
At under 15 times this year's earnings estimates of $2.65, and with an anticipated growth rate of about 12% going forward, I think that the company still has some upside. Realistically, I could see the stock trading in the $45 range within the year.
There was a news release disseminated on Thursday morning which said that Wal-Mart is renegotiating leases with banks located inside its stores. And the language that is being included in these leases is that Wal-Mart will be allowed to offer mortgages, home equity loans, and lines of credit either directly or through a third party. Some folks are now speculating that this means that Wal-Mart is about to make a major foray into the lending business.
For what it's worth, Wal-Mart has officially said that the wording being placed in these leases is nothing really new. After all, the company already offers check cashing and branded credit cards.
So what gives?
I think that Wal-Mart will definitely expand its financial services business over the next year or two. But to what degree remains to be seen. And if Wal-Mart does delve specifically into the mortgage business I think that it would be a good thing for consumers. I mean if nothing else it would force other mortgage companies to be more competitive on pricing.
However, for Wal-Mart itself, I think it would a bad move.
Why get into the mortgage business?
Credit cards I understand. That's a smart way for the company to earn interest off their customer's purchases. But mortgages are, in my mind way riskier. Instead of financing a couple of thousand dollars on a customer's account, they would be financing hundreds of thousands of dollars, and have to build out a pretty big infrastructure of personnel to support such an effort.
It just seems like too much work and too much risk, with too little potential reward. Besides, do you know how many lenders are reeling these days given the increasing delinquency rates? A lot!
Plus Wal-Mart has enough problems. It's under pressure from union groups who say that the company doesn't pay a fair wage. In addition its same-store-sales are pretty soft (hovering in and around 2%). Adding mortgages into the mix would only complicate things.
The Bottom Line
Wal-Mart has a long operating history, and a profound sense of what works and what doesn't in the retailing world. But in my mind they know very little about the risks associated with mortgage origination. Again, it's not totally clear if Wal-Mart is going to make a major push into the mortgage business. But if it does, I think it would be a huge mistake.