Hewlett-Packard Looks Risky

 | May 23, 2013 | 11:00 AM EDT
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After Wednesday's close, Hewlett-Packard (HPQ) reported its fiscal second quarter and, as expected, it was a mess. But an ugly set of results weren't enough to stop investors from bidding up the shares. The stock was up about 11% to $23.64 in Thursday morning trading. Since shares bottomed out in November, the stock has doubled. Apparently, investors are holding out hope the worst is over or that management will spin off the PC business. If so, the stock could fetch $30 per share.

The conference call sounded like the triage unit at an emergency room: personal computer sales down 20%, consumer revenue down 29%, total PC units down 21%, desktop units down 18%, notebooks down 24%, server revenue down 12%. And Business Critical Systems (BCS) are in critical condition, posting a revenue decline of 37%. Quick, call the Red Cross.

The only positive I saw was a sequential rise in operating margin. Total adjusted non-GAAP operating margins rose 0.7% to 8.6%. The company ended the January quarter with a 7.9% operating margin. The other piece of good news came from the cash flow statement. H-P was able to generate more cash in the first two quarters of the year than it did all of last fiscal year.

Its balance sheet is in rough shape and could use some good news. CEO Meg Whitman told investors she believes the company is on track with its turnaround plan. She seemed to think H-P could return to growth as early as next year.

I see only two types of investors left in HPQ: speculators willing to take a chance that H-P has been through the worst and things can only get better, and those speculating the company will be forced to break up by spinning out the personal computer business. (I guess a third type is investors who've stayed short the stock too long.)

Unless you're willing to take a high-risk gamble, I don't see how HPQ can go much higher. With a secular decline in its core business, management has to do something dramatic. But I don't think that is going to happen. Just cutting costs and hoping business stabilizes at a lower level isn't a growth strategy. I'm not willing to gamble that H-P can reinvent itself.

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