At the risk of sounding like I want to pile on to Hewlett-Packard's (NYSE:HPQ) misery, this company may become my go-to example for the years to come in the risks of "how much worse can it get?" thinking. I just don't see a lot of strength here in terms of high-quality end-markets, and I question whether the company can position itself for demands of the always-evolving IT world of tomorrow. Though this stock still looks exceedingly cheap, I have absolutely no confidence that this management team can guide the company back or harvest that underlying value.

Applying The MACD Indicator With MetaTrader 4: How to use MetaTrader 4, a trading platform used for online trading in the forex, CFD and futures markets.

A Tough Close to Another Rough Year
Between the reports of companies like IBM (NYSE:IBM), Dell (Nasdaq:DELL), and other IT hardware companies, there was little logical expectation that Hewlett-Packard was going to have a strong quarter. Although the actual reported results weren't really any worse than expected, there was still plenty of bad news to further rattle a frustrated shareholder base.

Revenue fell 7% from last year on an as-reported basis, with a currency-adjusted decline of 4%. Every major unit but software was down as reported, with computers' (Personal Systems) decline of 14% and storage's 13% negative revenue comp pacing the bad news. Printing revenue fell 5%, services was down 6% and consolidated servers/storage/networking fell 9% (with networking up 7%, servers down 7%, and storage down 13%). Software was the bright spot, with revenue up 14% from last year.

All things considered, margins weren't bad. Gross margin improved three points as reported, with a better than one point improvement from the third quarter. Non-GAAP adjusted operating income fell 1% from last year, with operating margin up more than half a point. Printing in particular saw good margins (a five-point year on year improvement), while hardware margins eroded badly.

Autonomy - A Questionable Deal Gets Even Worse
When HP announced a little more than a year ago that it was going to spend more than $10 billion to acquire British software company Autonomy, there were more than a few analysts who thought HP paying a 75% premium was far too much for this enterprise analytics and data management software company. Yes, unstructured data analysis is a big deal, and HP was under pressure to keep up with the cool kids like IBM and Oracle (Nasdaq:ORCL), but it was a pricey deal with a lot of execution risk.

HP hadn't really done much in the following quarters to convince the Street that Autonomy was the right deal (and/or at the right time and for the right price). Now the story is getting even worse.

With fiscal fourth quarter earnings, HP management announced a $8.8 billion writedown of Autonomy and asserted that there were various accounting improprieties and misrepresentations that were unknown to the company at the time of the deal. It's tempting to call "sour grapes" on this, but HP management tied about $5 billion of the writedown to these accounting issues and apparently will look to the courts to try to recover some of that lost value for shareholders.

Disappointingly, current CEO Meg Whitman tried to throw former HP executives Leo Apotheker and Shane Robison under the bus for the Autonomy debacle. While Apotheker certainly deserves plenty of the blame (if CEOs get the credit when things go well, they deserve the blame when things go south), as does Deloitte (the auditor involved), Whitman was on the board at the time and voted for the deal. More to the point, I suspect that had the Autonomy deal gone well and surprised everybody to the upside, she wouldn't be so eager to bring Apotheker's involvement back to people's minds.

Where's The Growth?
I wasn't overly impressed with HP's analyst day back in October, and nothing here has gotten better since then.

I don't think the company's computer business is hopeless, but I doubt either HP or Dell will reclaim the top spot from Lenovo (OTC:LNVGY). Likewise, while the printing business can generate cash flow, that sizable drop in hardware unit sales (20% this quarter) is worrisome. Also worrisome is HP's weak positioning in the evolving mobile device market, be it smartphones or tablets.

I likewise see problems elsewhere in hardware. I don't think the company is really a credible threat to players like EMC (NYSE:EMC) or NetApp (Nasdaq:NTAP), and I think established rivals like Cisco (Nasdaq:CSCO) and IBM are ample threats to the server and networking businesses, to say nothing of the migration to software-defined networking (SDN), an area where Cisco, VMware (NYSE:VMW), and Oracle are already making major investments. Last and not least, I see no particular reason to think that HP's service or software businesses have sustainable competitive advantages.

And, in my opinion, it just gets worse from there. HP is still trying to staunch its bleeding, and it's hard to plan for the future when you're busy trying to plug leaks in the dyke today. What's more, I'm not sure HP can turn to that tried-and-true catch-up strategy in Big Tech of acquisitions - with the embarrassing Autonomy failure still playing out (and 3PAR not really a raging success), I can't imagine shareholders will enthusiastically greet another big acquisition.

The Bottom Line
If HP can grow at all on a long-term basis, these shares are likely substantially undervalued today. But, as in the case of Dell, the near-term problems are so large today that few investors have the courage to bet on that better long-term picture. Consequently, while it's not hard to see potential value in HP shares, the Street is likely going to need to see substantially better execution before believing that this management team can realize that value.

At the time of writing, Stephen D. Simpson owned shares of EMC since September 2012.

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  5. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  6. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  8. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!