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Wednesday, May 18, 2005

I wouldn't jump into HP's que

Hewlett-Packard+Compaq’s shares have risen almost 25% in the last week, powered by a jump based upon today’s ‘strong’ earnings report. Wall Street was excited that the company didn’t lose much business based upon the executive transition from Fiorina to Hurd. While I like Hurd's background, I’m not buying into the turn-around story yet and I think money would be better invested elsewhere in tech. I think HPQ has a long way to go before it sees the benefits of Hurd's efforts.

Tech is not a sector to be holding broadly at the moment (or for the near future for that matter). While I won’t go as far to say that we’re ‘separating the winners from the losers’, I will say that I’d rather hold names that are executing very well in growth markets (hi GOOG!). Hewlett-Packard is not one of those companies, in my opinion.

Let’s review recent events for this company:

- The company known for advanced technology innovation achieves strong growth based upon PC manufacturing while other tech companies in Silicon Valley are inventing things like the Internet, Enterprise Apps, Security Applications, etc…

- Then it brings in a CEO who looks great on paper, is female and is an excellent presenter.

- HP runs into serious competition in PCs, at which point it decides that the best thing for it to do is buy another PC manufacturer, Compaq, in order to achieve scale in the quickly commoditizing industry.

- One of the board members and founding family members correctly but unsuccessfully attempts to halt the merger. His loss is largely due to the fact that he possesses less charisma than the CEO.

- HP lucks into a business that is low-tech but lucrative as a saving grace: printers and replacement cartridges.

- The CEO then tries to refashion its image to match IBMs.

- After it becomes painfully clear that HPQ is not IBM, the CEO is fired.

- A new CEO is hired to bring some semblance of order to the mess.

- HPQ has a ‘less-than-feared’ quarter and rebounds significantly in value.

Give me a break? This is a company in transition to better things? I’ve worked with companies in trouble before and one thing I know is that they have to hit bottom before they turn around. HPQ is not even close to the bottom. In fact, HP hasn’t done much of what it is vaunted for: innovation. HP’s greatest innovation in the last 5 years is its printer business, and I don’t see how they maintain competitive advantage in that business.

HPQ’s ONLY saving grace is its printer business. Everything else should be scrapped. This company has been a bureaucratic mess for a long time. They’re fighting for dwindling shares while smaller, nimbler, younger, better-positioned, less-baggage-carrying companies are driving success around them. Additionally, I believe that success in business has a lot to do with the people within a company. HP right now is either: A. firing a lot of the people responsible for various aspects of running the company, B. lowering salaries across the board, or C. letting the people who screwed things up in the first place remain in their seats. It's a no-win situation for the investor.

You can guess what I’d be doing with HPQ’s recent rally.

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