By Eric Jackson, Senior Contributor08/11/10 - 05:11 AM EDT
With Mark Hurd out as the CEO of Hewlett-Packard(HPQ), many are trying to argue that the stock is a great long play here trading at $42. I think you're better off steering clear of it for now until there's greater certainty about what's going to happen with the next CEO.
In the aftermath of the surprising departure of Hurd on Friday, and the 8% drop in the stock on Monday, some HP bulls have been stating that now's the time to get a position in the stock. Their argument goes as follows:
- HP is a great franchise with many solid businesses. It's bigger than Mark Hurd.
- It's cheap. It trades at 8 times current year's earnings and 9 times next year's.
- Since the stock has really performed well in the last few years, you can continue to rely on it being a steady performer in the years to come.
- HP has solid positions in its markets today, but many of those markets (like PCs, printers, and technology services) could well see a drop in business in the next few years if they're managed poorly.
- The stock may be cheap relative to others but what is most important for any new investor in the stock is that question about whether it is cheap today relative to where the stock will be a year or two from now. If HP bungles this transition and squanders its lead in several of its businesses, the stock could easily drop another 20%.
- HP's stock actually hasn't performed well recently. Investors only think it's performed well because of the Mark Hurd "halo effect" that's gone on -- think of it like a "Vulcan mind trick."
- We have no clue who the next CEO will be. I'm pretty sure Todd Bradley will be the top internal candidate, although Ann Livermore will get consideration. I'm sure they'll also look at some outside candidates, too. My guess is that they'll pick Bradley as a safe choice but I'm not convinced he'll be a savior for the stock. They could hire another Carly -- heaven forbid. Do you want to put your wealth (in the form of HP stock) in the hands of this board to do the right thing?
- When you cheat on the small stuff, you tend to cheat on the big stuff. Although some Hurd apologists and friends say that HP is making up the whole expense-gate issue to avoid the bad press associated with a sexual harassment, the fact is that he reported charging $243,000 in personal meals to HP shareholders in 2008 and then had the temerity to demand that he be grossed up another $75,000 so that he wouldn't owe any taxes to the IRS on that benefit.
- Who's going to finish the job integrating the EDS, 3Com, and Palm acquisitions? The master integration-and-execution guy is gone. We're going to see if the rest of the team is up to the task. These are all big and complex companies. It will take real work to integrate them successfully and the Palm group might never be able to deliver new products to captivate the market's tastes.
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