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By Ronald Fink
Is Hewlett-Packard's resurgence running out of steam? Why else announce a tripling of its stock repurchase program?
Yes, CFO Cathie Lesjak said the repurchases are part of a plan announced earlier, but H-P could just as easily have said it doesn't need to buy back that many shares right now.
While the stock is up almost 42 percent in the past year, investors reacted negatively to the news, which came after the close of the stock market on Monday. Despite a 14 percent increase in fourth-quarter profits from a year earlier, shares were down as much as 2 percent since earnings were released.
Sure enough, the earnings increase was accomplished on the back of cost cuts, with some 19,000 jobs eliminated following the acquisition of service provider EDS last year. Investors may have discounted such an earnings gain as unsustainable, since revenues for the quarter were down 8 percent.
That suggests the company will have to do more than buy back shares. In fact, analysts expect the company to engage in further acquisitions. But investors seem skeptical new deals will do all that much to jump-start growth.
Certainly the recent one for 3Com represents a challenge, as that company's products are perceived by end users in the corporate technology sector as inferior, according to Thomas DelVecchio, director of the CIOZone Research Network, an affiliate of CFOZone. "While HP's acquisition of 3Com is viewed favorably in the all-important enterprise end user space, 3Com is viewed as being a lower-cost alternative, with products that are inferior to those of its competitors," DelVecchio said in a note on Monday accompanying the findings of several surveys by the research network of H-P end users in the enterprise market.
Much may depend on H-P's vaunted ability to innovate, which could be used to improve 3-Com's products. "H-P has ranked near the top for innovation whenever this question has been posed to end users," DelVecchio added.
But the survey found H-P's corporate customers are concerned about the threat posed by the collaboration of VMWare, Cisco and EMC on Vblock infrastructure packages. These are a combination of enterprise technologies, including virtualization, networking, computing, storage, security and management products.
The potential problem is that the vendors may muscle H-P out of server sales. Twenty percent of 118 survey respondents cited H-P as the company most vulnerable as a result of the collaboration, while fewer than 15 percent said IBM or NetApp would suffer the most. DelVecchio suggested H-P could benefit from an acquisition of NetApp, but he said that was unlikely at this point because its current stock price "is difficult to rationalize."
Still, DelVecchio thinks H-P's problems are short lived. "HP has been cited frequently [among end users] and ranks above average in our surveys as being 'in consideration' for projects slated for completion by year-end 2009," he said.
DelVecchio noted that the survey findings also suggested that the collaboration of VMWare, Cisco and EMC could backfire if they excluded H-P, since its products are viewed more favorably than Cisco's.
As one end user told the research network, the collaboration "could have real benefit, but could also interfere with existing server practices if they try to keep H-P out."
And DelVecchio said that he expected H-P to make other acquisitions in the networking space that will solidify its position.
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