We were pleased that Hewlett-Packard (HPQ) decided to suck it up and write down $8B worth of goodwill from its 2008 EDS acquisition. We are not ready to join Ralphie Whitworth of Relational Investors and Seth Klarman of Baupost in buying the stock but we are seeing a number of trends that encourage us to actively evaluate the company. We are going to wait and evaluate what is going on with the company in order to determine whether or not a “perfect pitch” will be coming our way. We will be carefully evaluating this company because although we have respect for Meg Whitman (HP’s new CEO) as a manager, we are concerned that Hewlett-Packard could be a value trap. There are things about HP that we like, such as its trailing PE being less than 5X adjusted TTM EPS and that it still generated $3.86B in free cash flows YTD in 2012. We also like the fact that two leading activist value investors have over $1B invested in HP. Unfortunately, we are not ready to pull into Bill and Dave’s Garage just yet since we see more things about the company that we don’t like, such as its declining revenues, EPS and free cash flows (which declined from $7.87B in YTD 2011 to $3.86B in YTD 2012). In our professional opinion, we see HP as a once-great formerly mighty blue chip which has lost its edge and is now a raw, special situation turnaround project.
Corporate Highlights or Lowlights (Depends on your view)
HP’s most recent reported loss of $5.8B was not really a surprise to us, since in Q2 it preannounced that it would write-down over $2B in non-recurring charges for restructuring and impairments to the value of the Compaq trade name. Furthermore, we think that HP’s management decided to take a big bath’s worth of charges this quarter by taking an $8B charge for goodwill impairment on EDS (HP Services) and by increasing the Q3 restructuring charge from the $1B that was previously announced to $1.8B.
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