HP battling its way back to tech premier division

ANYONE with a keen interest in English Premier League football will have a view about ‘transformative management’.

You either believe in the mystical qualities of a ‘special one’, or you believe that clubs can just get lucky, or unlucky, as the case may be.

If you take the latter view, you may have followed the recent history of American technology giant Hewlett Packard, the company we put under the microscope today.

As a market leader, HP had lots to boast about. It was one of the original Silicon Valley giants, born in a small garage in Palo Alto, California.

Having grown to distinction 20 years ago, it was deemed to have ‘leadership challenges’. It appointed the feted Carly Fiorina as CEO and while she purchased a competitor, Compaq Computers, it didn’t stop the share price plummeting.

In 2005, she was replaced by Mark Hurd (now CEO of Oracle). He was forced to resign over the hiring of a private investigator to check on board members. Mr Hurd was replaced by a German executive Léo Apotheker. He changed strategic direction, ceased the development of tablets and smartphones and bought a software company. Investors didn’t warm to his strategy either and Mr Apotheker walked.

Next in the hot seat was Meg Whitman, who had made a big mark as boss of eBay. Ms Whitman would eventually stun investors (and staff) when she announced the splitting of the company into two new groups. The proposal was to separate its computer and printer business (HP Inc) from its faster growing corporate services (HP Enterprises).

This was not the first seismic shift to shake the technology pioneer. It was, however, its biggest.

Many analysts were left scratching their heads and counting the cost of the many HP screw-ups, which included the $1bn (€802m) purchase of Palm Computers, long written off; others included ill-fated takeovers that resulted in enormous $16bn (€12.8bn) write downs.

Separating the group was completed in late 2015 and the ‘old’ HP group ceased to exist. The new HP Inc, with 49,000 employees and headquartered in California, now provides personal computers, imaging, printing products and it also inherited

18,000 patents.

The company operates in an industry subject to rapid and substantial technology changes and while the decline in some of its markets has moderated, it still faces intense competition.

Following the breakup, investors were unsure about HP Inc’s future and the share price traded as low as $7.

First year results were not good. Revenues of $48bn were down on the previous year and net earnings were half at $2.5bn. Earnings per share and cash flow fell.

The group’s personal computer business, which includes notebooks, desktops and work stations, had sales of $30bn and operating profits of $1bn. Notebooks are the group’s biggest sellers at $17bn followed by desktops of $10bn and workstations with less than $2bn. In comparison to previous years all showed a decline.

HP’s printer business at $18bn also declined, but has superior operating profits. To bolster its Asian presence, HP acquired Samsung’s printing business for $1bn last year.

Results for 2017 are more encouraging and offer some relief to investors. Revenues, earnings per share, operating profits, cash flow and its share price all showed increases, as did sales in each of its regional operations in USA, Europe and Asia.

The group is valued at $38bn with a modest price to earnings multiple of 14. Revenues at $52bn showed an increase of 8pc, operating profits were up to $4.4bn and investors saw the share price over the year rise from $14 to $23.40 (€18.81).

It helped that the group returned $2.3bn to shareholders between share purchases and dividends. Investors were also pleased that sales in the computer business were up 10pc to $33bn, but wafer thin margins are a concern. The group’s printer business, which accounts for 72pc of total profits, has margins five times greater. Overall, HP Inc is now moving in the right direction, but it’s not in the premier division yet.

HP’s printer business has superior profits

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.