HP's future prospects: A look at three scenarios

HP's future prospects: A look at three scenarios

Summary: HP's future is very much in question. Here's a look at a base, best and worst case scenarios.

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HP shares took a big hit on word that it will spin off its PC business, discontinue the TouchPad and buy Autonomy in a bid to beef up its software portfolio, but Auriga analyst Kevin Hunt thinks the company has some value---more like $32 a share.

Now Hunt isn't exactly complimentary to HP. After all, his research note is titled "Even a mess eventually has value." But Hunt does walk through three scenarios for HP---a best case, a middling base case and a worst case. Meanwhile, HP's TouchPad fire sale over the weekend didn't exactly bolster confidence.

Here's a look at Hunt's reasoning as you think about HP's future.

Hunt sets up his note by making the following points:

  • HP has understandably taken whacks for missing earnings targets and cutting analysts.
  • Former CEO Mark Hurd set up many of the factors that are now giving Leo Apotheker a headache. Hunt was down on HP in the Hurd years due to increasing use of pro forma metrics, suspect acquisitions and cuts in R&D spending. "We feared the company would have to substantially ramp R&D spending to remain competitive as an enterprise supplier after years of overzealous cuts by Hurd," said Hunt.
  • Hunt isn't a fan of the Autonomy deal or the timing of the PC spin-off.
  • Nevertheless, HP shares have taken a beating and may be worth more for the patient shareholder.

Add it up and HP's future goes like this.

  1. A best case scenario where HP gets good value for its PC business, improves software and services and ultimately gets some props for reinventing the company.
  2. A middling case, where HP plods along with its current portfolio and ultimately decides to keep the PC division, which will lose some market share.
  3. A worst case outcome where HP spins off the PC division, but still can't execute. Ultimately HP shares crash to $11 and the company becomes irrelevant.

Working through these scenarios from Hunt is an interesting exercise.

The middle of the road case, assumes that Autonomy is added to HP's portfolio, but the company loses $5 a share in cash (the $10 billion used to buy Autonomy). A weakened PC unit remains with HP. Even assuming a slowdown in tech spending and a plodding printer business, Hunt gets a $38 price target for HP shares based on cash flow.

The extremes, however, are far more interesting to watch.

Hunt's best case scenario is that HP spins out the PC business and gets good value for it. Hunt said:

HP management has done a fairly remarkable job in turning this business around since the Compaq acquisition nearly a decade ago. At that point it was a lagging business with consistent losses. Today it is the market share leader with industry high operating margin. In sum, there really is nowhere to go but down, especially with the threat of tablets looming over the business. If HP is able to maximize value here, they could then put a greater focus on improving results of the recently challenged enterprise focused businesses. It is not unreasonable to assume the PC business could bring decent value, as it is a low capital intensity business, with high free cash flow, so even if “the PC is dead”, or even declining, a decent return on investment can likely be achieved.

How would a spin-out of HP's PC business do? Hunt compares HP's PC unit to Lenovo, which is on a roll today after acquiring IBM's PC business in 2005. Hunt's other comparison is that Arrow, a value added reseller. Why Arrow? PC businesses these days act as resellers---they take PC parts, put them together in a box and market them. Based on Lenovo and Arrow comps, HP could fetch an enterprise value of $9.3 billion.

If HP keeps the printing business, it keeps a lot of cash flow. If the execution is there, HP's assets can garner a market cap of $98 billion, or $47 a share.

The worst case scenario for HP is flat-out ugly. HP continues to overpay for acquisitions---the Autonomy deal is just the latest. For reference, Autonomy cost HP 15 percent of its market value for an outfit that will generate less than 1 percent of sales and 2 percent of expected profits. HP's book value is also hurt by the Palm deal, said Hunt. These pricey acquisitions mean that much of HP's book value goes to goodwill that was acquired---and will probably be written off later.

According to Hunt, the bearish case assumes that HP's PC business unravels. The post-PC era really arrives and HP's PC unit is only worth $3 billion as a standalone entity. While HP reels from not getting full value for the PC business, its printer business also stumbles and is worth only $12 billion or so. As these unpleasant HP events unfold, the company has to pony up to fix its services business, but the payoff never comes. "In that case, we believe the Street will begin to view HP as a dinosaur on its way to extinction, like many of the tech names of the past. So rather than choosing a world class executor like IBM as a comp, we decided to use 'old school' tech companies like Cray and Unisys, companies that most investors probably think went away years ago, but are still out there plugging away," said Hunt.

If PCs, printers and services stumble, HP could be seen as a dead company walking. If HP also fails to execute, shares could hit $11 if everything goes wrong.

The wild card for the worst case scenario is that private equity investors could swoop in before HP got that bad. In addition, management would be replaced. The other wild card is that Oracle and Larry Ellison could take out HP before everything unraveled.

Bottom line: The truth here probably lies in the middle somewhere, but the prospects are worth noting.

Related HP posts:

Topics: Hewlett-Packard, Hardware

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23 comments
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  • Apple could be the hero here...

    Buy HP's PC division. Keep it going but use their massive cash balance to undercut Dell, so that Dell is making pennies on every computer sold. Put Dell and every Wintel OEM out of business. Then shut down the PC division they just bought.

    Rid the world of Windows crapware forever. Steve Jobs goes down as the greatest tech savior of all time.

    End of story.

    Then again, Balmer will put MS out of business on his own given enough time!
    ShazAmerica
    • RE: HP's future prospects: A look at three scenarios

      @ShazAmerica Your suggestion is scary on so many grounds. Apple already charges too much for their computers and imagine what they would do if they were a monopoly?
      statuskwo5
    • RE: HP's future prospects: A look at three scenarios

      @ShazAmerica

      troll too much?
      owlnet
    • RE: HP's future prospects: A look at three scenarios

      @ShazAmerica
      Do you always think like that? I think you definitely need to go for consultation.
      Ram U
    • Buy cash at a discount!

      See, this is what happens when people get MBAs from those places that sell diplomas via spam.
      Robert Hahn
    • Change your ID to "StupidityInc", and your post would be more meaningful.

      ;)
      adornoe
    • RE: Then again, Balmer will put MS out of business ...

      @ShazAmerica

      We can only <b>pray</b> for that to happen.
      fatman65535
    • Wow

      @ShazAmerica What a completely uninformed, unintelligible statement.
      happyharry_z
  • HP know where their core profit centers are

    They will land on their feet just like IBM.
    Dietrich T. Schmitz *Your
    • Doesn't really feel like and IBM-esque turnaround

      @Dietrich
      IBM trains their leaders for years. HP replaces and hopes for the best. Hurd gutted the company to produce profits. Apotheker seems lost. They may make it (probably will), but I don't expect it to be pretty. I seriously doubt that their image will fair as well as IBM's.
      markh@...
    • RE: HP's future prospects: A look at three scenarios

      @Dietrich T. Schmitz * Your Linux Advocate <br><br>I think they'll make it through but I'm not sure how much of HP will be left at the end of it, had they bought Accenture rather than Autonomy I'd be agreeing with you but the storm clouds they have because of Hurds cost cutting are highly problematic.<br><br>Consider:<br><br>1. Software development funding was cut to the bone in the Hurd years and 1 big buy is not going to fix that immediately<br>2. Itanium is taking a beating becuase of Oracle dropping support<br>3. Exiting the home pc business, smart move but incredibly dumb to announce it to the world like that<br>4. Consultancy (formerly EDS) was hammered in Hurds cost cuttings (an accenture buy would have really righten the ship in this case)<br><br>Considering their troubles and the fact that IBMs turnaround took 10 years its not looking good for HP
      the.nameless.drifter
      • RE: HP's future prospects: A look at three scenarios

        @the.nameless.drifter
        I agree for the most part... but Itanium was already taking a beating before Oracle , MS, Redhat dropped support.
        EDS has been heavily thrashed, and alot of their business is in the critical mainframe space... where it takes years to build up expertise, just as many of the old timers across the mainframe industry are looking to retire.
        Exiting the PC market is smart, but the timing should have been BEFORE they acquired Compaq. Even IBM's exit was late.
        What's even worse for HP, is WHO can afford to buy the PSG group? The interest charges alone will make it not very profitable for any company that chooses to run the numbers. I am not even sure that they will get more than what they spent on the Compaq deal.

        At this point, it's really hard to see where HP will be making it's money in the future, basically it's a company that has been run into the ground and it may be best to sell it all off, a piece at a time.
        scotth_z
  • Rainbow chasers

    To me it looks like he worked at a successful company SAP, and he's trying to turn a failing company HP, not into *a* successful company, but rather into THE LAST SUCCESSFUL company he was familiar with, SAP.

    So he's bought a company that sells some vague software at huge mark-up to corps, which is essentially what SAP does. SAP do corporate hand holding on accountancy, he think (IMHO) Autonomy can do the same for compliance.

    Rather than senior management getting grips on their finances or compliance, they'll get a grip on SAP or Autonomy who promise to get a grip on their financials and compliance in turn.

    But what do HP bring to Autonomy? Nothing but a name. What do Autonomy bring to HP? 1/7th of the value they're paying for.

    I think Leo Apotheker is an Elop figure. A rainbow chaser.
    guihombre
    • RE: I think Leo Apotheker is an Elop figure. A rainbow chaser.

      @guihombre

      I think you are right, and Leo expects to find a <b>pot of gold</b> at the end of the rainbow. It would be too bad if he found out that the "pot" was full of gold plated s---.
      fatman65535
  • RE: HP's future prospects: A look at three scenarios

    Not sure I understand the comparison to Arrow. If you are referring to Arrow Electronics, they are one of the largest value-added DISTRIBUTORS, selling HP, IBM, ORACLE, and all the major H/W and S/W brands to thousands of value-added resellers globally who ultimately sell them to end user companies and consumers.
    ctombazian
  • How about case no. 4?

    Once divested of the PC and mobile divisions, HP merges with SAP. More here:

    http://venturebeat.com/2011/08/21/why-hp-needs-to-merge-with-sap/

    There is actually some synergy with this route.
    Rabid Howler Monkey
  • RE: HP's future prospects: A look at three scenarios

    Imagine being the IT director at an Oracle shop running HP Itanium servers. You're just wrapping your head around the idea of a massive hardware migration when -- BAM -- your HP guy comes in to tell you they aren't going to be selling PCs anymore either.

    First you throw the HP salesman out the twelfth-story window. But then whom do you call?
    Robert Hahn
  • RE: HP's future prospects: A look at three scenarios

    Vague software? Maybe.. but I've been using it (VMS) for maybe 15 years and it never, ever been broken into or lost data. NSK is a goodie as well. H/P is a good company, they will survive this, like having a flat tire. Some effort and one is back on the highway. I don't know why they do not do as well with their PCs as Dell. The equipment seems good to me; I like what I have at home, and I also have it at work -a notebook. HP and SAP could be a good thing. HP already has high end computing.
    opcom
  • RE: HP's future prospects: A look at three scenarios

    Hp printers now are crappy not built like they used to be I think getting rid of the PC's part will kill them.
    Randalllind
  • CEO lack of vision....

    Since beggining, they should have made some hybrid solutions with WebOS and Pads... Something like Android/WebOs then when they have a solid know how with WebOs and one piece of the market, that even small, they could, start having more profit indeed would have a stable OS, with more apps. What he did it's a (he thinks) quick solution, that will drag HP backwards for years to come. If they don't invest heavily in R&D. In my vision the worst they already have done, now that the plane was taking off, they landed it and quit. Awe full decision made, look now with this pads burn out they got one big base in days... why give up now??? What's the point in waste a lot money to release a product and then toss everything away???? Bad business vision, like MS CEO has...
    villacak