It is always interesting how quickly the investor community can turn its back on a company. Technology giant Hewlett Packard (HPQ) has seen its support wither after its CEO Mark Hurd resigned over questionable behavior earlier this month. HP’s stock has cratered nearly 20%, from above $46 to around $38 per share, and all of the sudden investors insist that HP has lost its way. The loss of Hurd is definitely a negative, but should the tables be turning on HP this dramatically already?
Fueling that argument is the news this week that HP decided to enter a bidding war with Dell over 3PAR (PAR), a small data storage company. After initially being courted by four companies, Dell and HP were the finalists to acquire 3PAR but HP had been previously unwilling to outbid Dell’s $18 per share offer. However, after Dell and 3PAR announced the deal HP decided to bid $24 and try to steal it from their competitor. Sporadic behavior on HP’s part? It sure seems like it, as the critics were quick to point out, but maybe HP simply had a change of heart. Maybe Mark Hurd was against a higher offer and now that he is gone, top management at HP decided they really should acquire the company. Who knows.
What we do know, however, is that HP has lost their CEO and is now willing to pay at least $1.6 billion to fill out its product line. Are these actions worth a nearly 20% hit to HP’s stock price? Given that HP shares were cheap to being with, I think the sell-off is overdone, as is the bearish sentiment towards the company all of the sudden. At $38, HP stock trades at merely 8.5x fiscal 2010 earnings estimates (there are only two months left in their fiscal year, so readers need not complain that I am failing to use trailing earnings, which would make the P/E ratio 10.7). And yes, using 2011 estimates of 11% profit growth (to $5 per share), HP’s forward P/E stands at just 7.7 times.
The risks here appear to be both obvious and less than dramatic. Could the absence of Mark Hurd send the company into an operational tailspin which would reduce market share and hurt profits? Possible, but unlikely. Hurd’s top lieutenants remain at the company and are very likely to continue the management style and game plan he has had in place for several years.
Could overpaying for 3PAR hurt the company’s finances dramatically? No chance, as HP has cash on hand of $14.7 billion.
Could Dell adding 3PAR to its arsenal materially cut into HP’s business? Unlikely. 3PAR generates only about $200 million in annual sales, a drop in the bucket for a company the size of Dell ($60 billion in sales) or HP ($125 billion in sales annually).
Could the empty CEO job cost HP some customers? Unlikely. As a CTO, would you switch vendors if you have had good experiences in the past, simply because the company’s previous CEO allegedly charged personal expenses to the company in what could have been an attempt to woo a female contractor? You would probably agree with me that giving him the boot should suffice.
To me it is pretty clear that HP stock is getting unfairly punished lately. As a long term value opportunity, I think it looks attractive.
Full Disclosure: Long shares of HPQ at the time of writing, but positions may change at any time.