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Reality will hit H-P investors soon enough
The stock could continue its recent gains over the short-term as investors bet the next CEO will improve the company. But it won't last.
By Robert Walberg
As a medieval history major, Carly Fiorina surely grasps what just happened to her. And investors ought to realize the lesson here as well: Today's run-up in the stock is unlikely to last over the long haul unless a new CEO takes drastic action.
Fiorina was pushed out because she failed to deliver on promises she made in 1999, when she rewrote history by becoming the first female CEO of a Dow 30 company. Back then, the brash new CEO promised investors that Hewlett-Packard (HPQ, news, msgs) would deliver 15% annual growth, that it would become a leader in the "second phase of the Internet" and that she would reform the "H-P way" while building on its innovative and technology-driven past.
Fiorina's dynamic personality and legendary sales skills were seen as just the right mix needed to lift the stodgy, old-world Hewlett-Packard into the Internet age. But five years later, after a controversial acquisition of Compaq, and a history of inconsistent sales and earnings, those strengths are now perceived as weaknesses. Quite frankly, the Street began to wonder whether Fiorina was more interested in promoting herself than in promoting the best interest of H-P.
The biggest failure
Her biggest victory -- acquiring Compaq in a heated shareholder battle -- also proved to be her biggest failure. By emphasizing "scale," or size, over technology, Fiorina's decision to acquire Compaq, a struggling commodity-based PC company, essentially doomed H-P to a period of declining margins and lackluster growth. Meanwhile, competitors such as International Business Machines (IBM, news, msgs), Dell Computer (DELL, news, msgs), Apple Computer (AAPL, news, msgs) and Lexmark International (LXK, news, msgs) emerged from the tech downturn stronger than before.
Making matters worse, investors saw no definable strategy for getting H-P back on track. There have been flirtations with expanding the services business a la IBM; there's been an increased focus on consumer electronics such as digital cameras and digital music players a la Dell and Apple; and there's been talk of jettisoning the PC business altogether and returning to its core printer business where it still holds a commanding market share lead over the likes of Lexmark. What there hasn't been is any clarity of vision or strength of leadership.
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That's why the stock entered today's session trading at a deep discount to its peers. And that's also why investors celebrated today's news of Fiorina's ouster by sending the stock up on huge volume.
The honeymoon period
In exorcising itself of Fiorina, H-P is announcing to the investment community that it will return to its research and technology-driven roots. Obviously, none of us know at this point who will be the next CEO, or what vision that person will have for the company. However, much like in politics, H-P's new leader is likely to enjoy at least a six-month honeymoon period from investors and analysts.
During this time, investors can expect H-P's multiple to expand a bit further amid hope that the new leader will chart a course that improves profit margins, sheds unwanted, underperforming divisions, enhances return on equity, and restores sales and earnings consistency. Now, the stock trades at less than one times trailing 12-month sales. By comparison, IBM, Dell, Apple and Lexmark sport price-to-sales ratios of 1.7, 2.2, 3.3 and 2.1, respectively.
Until a new CEO and management team with a clear vision is in place, Hewlett-Packard should continue to trade at a modest discount to its peers.
Fiorina wore out her welcome long ago and was definitely part of the problem at H-P, but her ouster is only the first step in the long process of returning the company to a leadership position in the maturing technology sector. That reality should temper whatever enthusiasm investors display over the next few months.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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