A possible investment in HP can possibly be described in terms of the title of the 1966 western film starring Clint Eastwood- "The Good, the Bad, and the Ugly"!

The Good-  HP is an iconic name in the world of technology and remains a major force today in the world of personal computers, printers, and other related products and services. It continues to be the number 1 PC manufacturer in the world. It is projected to generate almost $120 billion in revenue for its current fiscal year ending October 31, 2012, and the same amount again in 2013. It is also projected to generate earnings for both the current year and fiscal 2013 of approximately $4 per share representing operating earnings of about $7 billion per year! The company has over $9 billion in cash-on-hand as of July 31, 2012, is trading at current levels at approximately 4 times projected 2013 earnings and pays out a current dividend yield of 3%. You know how they say the first step to curing or dealing with a major addiction or problem is admitting that the problem exists! Well, HP has taken this first step in readily acknowledging that all is no well with the company. Their new CEO, Meg Whitman, has begun the process of restructuring HP, with the major goal of refocusing its attention on more innovative and higher margin products. The restructuring is multi-faceted, however, it includes a reduction in work force by approximately 29,000 which should save the company as much as $3 billion per annum which is targeted to be reinvested back into research and new product development.

The Bad-  HP revenues have been declining and the company has also been losing market share in their dominant PC business to the likes of Lenovo. Their product mix weighs heavily towards the PC and printer markets and has been producing lower profit margins due to increased competition from others and the movement by consumers away from PC's and towards mobile phone products. HP has long-term debt obligations over $24 billion representing a debt-to-equity ratio over 75%, nuch higher than industry average. Its most recent quarter ending July 31, 2012 included a goodwill impairment charge to earnings of over $8 billion as well as an operating loss of almost $900 million.

The Ugly-  Unfortunately for many computer manufacturers including HP, the technology world does not stand still. The evolution of the Internet and the related products and servcies that have evolved have changed markets for some and created opportunities for others. And this is precisely why the HP stock price has slowly eroded from a high of almost $55 a share in April 2010, to under $18 today- decline of almost 70%! Investors began to worry that the commoditization of the personal computer and resulting lower profit margins was playing too great a part of the HP business and that in order to grow revenues and earnings going forward, management would have to move their attention to other more profitable businesses. Certainly, easier said then done, however, management actually began this transition to a more diversified and higher margin business through a number of acquisitions that began in 2008. These included the key acquisition of Electronic Data Systems(EDS) and eight ohter small acquisitions totaling over $14 billion.  The EDS deal significantly expanded HP's service offerings. During its fiscal year ending October 2010, HP completed 11 acquisitions including 3Com Corp. for $2.7 billion and Palm Inc. for $1.2 billion. These deals expanded HP product offerings to include networking equipment, data storage, and security and compliance management. At this point you might say-so what is the problem? Simply put- none of these acquisitions have dramatically transformed HP from its reliance on the PC business. Worse yet, some of these deals, like the Palm phone purchase, simply did not work at all! Because of the movement from the PC to the mobile phone, HP has been left out of this growth opportunity altogether! HP created additional turmoil within the company and investment community, by changing CEO's again after firing Leo Apotheker after only eleven months on the job, when it brought in Meg Whitman, former Ebay CEO, in 2011.

At the end of the day HP has sufficient resources to weather the current storm, however, survival is not what the marketplace rewards! It does reward revenue and earnings growth and a clear vision for a business in the future. There are many uncertainties with regard to the HP business model at this time and the jury is still out as to whether the new managment team will be able to turn around this giant enterprise by refocusing its resources on new products that are relevant in today's world. Compared to historical measures of valuation, however, the HP stock currently selling at less then 5 times earnings might be considered cheap! After all, after applying a more "normal" P/E ratio of 12 to HP's projected fiscal 2012 and 2013 earnings would result in a stock price of $48! On the other hand, if the market is right and HP is not undervalued at current price levels, lower prices could still be in the offing down the road. 

HP is a multi-billion dollar enterprise operating through a number of busines segments that produce a variety of products and services. Its operations span the globe and there are a number of risk factors related to its size and scope that if they were to occur could have a material adverse impact on the company's results of operation, and in turn could have a detrimental impact on the company's stock price. Some of these risks include the overall global economy and more specifically the European debt crisis that could reduce demand for company products and services and possibly erode profit margins. Aggressive competition in the marketplace from a variety of competitors could harm HP's financial results. HP relies upon third-party suppliers for components used in many of its products and services. The company's inability to manage these suppliers properly could result in lower revenue and profit margins. Any disruption to the company operations involving political events, natural disasters, terrorist attacks, security breach, or the like, could materially impact the company's overall financial condition. A variety of distribution methods are required by HP to manage its business on a worldwide basis. Failure to manage the distribution process could harm financial results. The company relies upon new product and services in response to competition and technological change. Inability to handle transition in this regard could cause serious harm to the HP business.

While the above risks are significant, perhaps the biggest risk facing HP today is related to a recently announced company initiative. In May 2012, HP announced a company-wide restructuring that would be implemented beginning at once and would be expected to last through the end of October 2014. The success or failure of this restructuring could go a long way in determining the fate of the company in the long-term! The HP plan could have a material adverse impact on company operations during this time period, which could significantly affect short-term revenue and earnings, and ultimately its long-term outlook, stability, and stock price. The major goals of this initiative to reduce the company's overall cost structure to better align with its business, consolidation of certain of its main business units, and a refocus on innovation and growth opportunities, will be difficult to achieve with no guarantees that the HP business after restructuring will be materially better off then before.

The risks outlined above represent a small but significant sample being dealt with by HP management.  The old saying, "the greater the risk, the bigger the reward", could not be more fitting for HP today! Investors that believe in the company and are willing to go against the current tide of negativity and pessimism in the marketplace, and should the company succeed in its efforts, they are likely to see significant stock price appreciation down the road. As a reminder, only a couple of short years ago HP was selling at over $55 a share!

Let's face it- HP is in turmoii! Wall Street has turned on this technology giant and has driven its stock price down to valuation levels not seen in decades. The uncertainty surrounding the HP business model, its new management team, falling revenues and earnings, have all conspired to create significant doubt in the minds of many investors as to whether the company can even survive in the long run!

Dave Packard's biography includes a quote that is a reminder to the current generation of HP leaders what was truly important to both he and Bill Hewlett and became a blueprint for their success during their time running the company. Hopefully, it is a reminder to the current managment team:

"We did not believe growth was important for its own sake. However, continuous growth was important for us to achieve our other objectives and to remain competitive. Since we participate in fields of advance and rapidly changing technologies, to remain static is to lose ground"

It appears Mr. Packard's advice has been lost by HP management over the past decade. Perhaps HP got complacent with success and truly lost touch with what made the company great in the first place-innovation! What does this mean for investors? The age old stock market adage to buy-low and sell-high is a nice concept but sometimes very difficult to actually do! If you believe that HP wil be able to reorganize and reenergize its business to take advantage of the opportunities in today's world of technology, then buying in at today's very low stock price levels could be very rewarding down the road.

(1) Historical background and data from www.wikipedia.org and www.hp.com