Saturday, August 28, 2010

Microsoft Should Raise Its Dividend

By Eric Jackson, Senior Contributor08/25/10 - 06:59 AM EDT


As a long holder of Microsoft(MSFT), I submitted last week a resolution for Microsoft to significantly increase its quarterly dividend.

It's my hope and intent that Microsoft will put this resolution to a free vote of its shareholders at November's shareholder meeting in Seattle. I believe that a vast majority of other Microsoft investors will feel similarly to me on this subject even though I've yet to speak with them.

A copy of the formal resolution sent to Brad Smith, Microsoft's general counsel and corporate secretary, can be found here.

The actual resolution is simple:

RESOLVED, that Microsoft Corporation's shareholders recommend that the board of directors of Microsoft adopt a policy requiring an immediate significant increase in the quarterly paid dividend to shareholders or an equivalent significant increase in annual Microsoft-sponsored purchases of its own stock on the open market.

To back this up, however, I was allowed to provide the following supporting statement:

While all Microsoft shareholders hold a belief that the Company's stock will increase in value over time as the Company increases its operational performance, there has been frustration that the Company's stock price has decreased 55% over 10 years from January 1, 2000 through July 26, 2010. Even with special and quarterly dividends received from the company, over the last 10 years, through July 31, 2010, Microsoft's total shareholder returns are -8.53%. Over the same period, the S&P 500 has returned -7.36% (including dividends).

During the last 10 years, many shareholders have called on the Company to pay a dividend and conduct stock buybacks, given the Company's strong cash position. As of June 30, 2010, the Company had $36.73 billion in cash on its balance sheet, and a trailing twelve months of operating cash flow of $24.07 billion.

Microsoft has initiated a quarterly dividend payment during the last 10 years, commenced doing stock buybacks, and paid a one-time special dividend in 2005.

At a $0.52 per share annual dividend yield, Microsoft is currently paying over $4.5 billion in dividends to shareholders. While that absolute number sounds large, it's actually quite small on a relative basis compared to other S&P 500 companies. Microsoft's forward dividend yield as a percentage of its operating cash flow is 18.7%. The corresponding percentages for Pfizer (PFE), Lorillard (LO), Duke Energy (DUK), and AT&T (T) - who are all among the current list Top 40 companies in the S&P 500 paying the highest dividend yield - were 82.1%, 49.7%, 29.2%, and 28.9% respectively. It's noteworthy that none of these companies has similar cash balances (or unused access to the debt markets) as Microsoft.

We believe that Microsoft could easily double its dividend or spend an equal amount on stock buybacks on an annual basis and still have ample cash flexibility to make strategic acquisitions, ongoing investment in the business through R&D activities, run its normal course of business, and keep an adequate reserve for general business uncertainty.

We believe that a dramatic increase in the forward dividend yield would attract a high degree of interest among large institutional investors such as pension funds who must meet challenging target annual returns for their pensioners. Unlike a special dividend, a commitment to a large forward dividend yield gives Microsoft shareholders a reason to continue holding on to the shares after payout. It also sends a strong message from Microsoft to its shareholders that the company's net profits belong to the shareholders.

We believe that the Company has an enormous strength that is under-appreciated by investors: its enviable cash position, operating cash flow, and access to tap the debt markets. Its market-leading core products and services will continue to provide significant cash to shareholders for many years to come. There are few other potential investments that can compare to Microsoft's cash-generating assets. At the same time, the capital markets are experiencing a high degree of uncertainty at the moment. Many investors will gladly escape that storm to find a welcome port as owner of Microsoft's equity, if the company significantly increases its payout of cash to shareholders through its quarterly dividend and stock buybacks.

The bottom line is that there is unusual uncertainty in the capital markets these days. Investors -- large and small -- are hungry for yield and Microsoft is better positioned to give it to them than any other public company.

When Microsoft started paying a regular dividend, some said that tech companies shouldn't pay dividends. We now know that our technology companies are among the richest and most stable. In many ways, they've supplanted banks as the most trustworthy and safest investment available for "widows and orphans." Returning excess capital to shareholders just makes sense.

Microsoft is better positioned than any other company to pay out a game-changing, large regular dividend. If Microsoft does that, investors will beat a path to the company's door because of the confidence management is displaying in its ability to keep up these payouts in the future, while also carefully reinvesting other excess profits to grow and protect the business.

We'll see in November if other Microsoft shareholders agree with me on this resolution.

........

[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

Sphere: Related Content

Revisiting the Orient Paper Ordeal

By Eric Jackson
RealMoney Contributor

8/27/2010 7:47 AM EDT
Click here for more stories by Eric Jackson


There has been relatively little news out on Orient Paper (ONP - commentary - Trade Now) for the last month or so. This small China-based paper producer jumped into the spotlight at the end of June when a previously unheard-of research firm called Muddy Waters claimed the company had issued fraudulent financial releases. In the wake of the allegations, Orient Paper stock -- which previously had been trading 200,000 shares a day (and, on some days, far less) -- now experienced daily volume of more than 1 million shares.

Several investors with long positions spoke out in favor of the company, while others with short positions stood behind Muddy Waters' allegations. Orient Paper's stock has been unquestionably volatile since the ordeal began, and the action has ultimately brought the price sharply lower. Today, the stock trades in the mid-$4 range, compared with more than $8 earlier in June.

The stock is, of course, cheap on a number of metrics. The trailing price-to-earnings ratio comes to 4.3x, and the trailing enterprise value per earnings before interest, taxes, depreciation and amortization is at 3.9x. However, a cloud of potential impropriety continues to hang over the company. Muddy Waters' allegations were numerous, including the inflation of inventory numbers, issuance of false numbers and diversion of funds from two recent private placements. Like a number of others, I have countered these claims -- and, not surprisingly, the long investors tend to agree with these views, while the short investors do not.

Orient Paper has tried to respond aggressively to the accusations, as well, via press releases and other means. Of course, in its most noteworthy action, the company's board recently authorized law firm Loeb & Loeb to engage an outside Big Four auditor to conduct a full third-party audit of the company. Deloitte was subsequently hired as that auditor.

....

[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

Sphere: Related Content

Revisiting the Orient Paper Ordeal

By Eric Jackson
RealMoney Contributor

8/27/2010 7:47 AM EDT
Click here for more stories by Eric Jackson


There has been relatively little news out on Orient Paper (ONP - commentary - Trade Now) for the last month or so. This small China-based paper producer jumped into the spotlight at the end of June when a previously unheard-of research firm called Muddy Waters claimed the company had issued fraudulent financial releases. In the wake of the allegations, Orient Paper stock -- which previously had been trading 200,000 shares a day (and, on some days, far less) -- now experienced daily volume of more than 1 million shares.

Several investors with long positions spoke out in favor of the company, while others with short positions stood behind Muddy Waters' allegations. Orient Paper's stock has been unquestionably volatile since the ordeal began, and the action has ultimately brought the price sharply lower. Today, the stock trades in the mid-$4 range, compared with more than $8 earlier in June.

The stock is, of course, cheap on a number of metrics. The trailing price-to-earnings ratio comes to 4.3x, and the trailing enterprise value per earnings before interest, taxes, depreciation and amortization is at 3.9x. However, a cloud of potential impropriety continues to hang over the company. Muddy Waters' allegations were numerous, including the inflation of inventory numbers, issuance of false numbers and diversion of funds from two recent private placements. Like a number of others, I have countered these claims -- and, not surprisingly, the long investors tend to agree with these views, while the short investors do not.

Orient Paper has tried to respond aggressively to the accusations, as well, via press releases and other means. Of course, in its most noteworthy action, the company's board recently authorized law firm Loeb & Loeb to engage an outside Big Four auditor to conduct a full third-party audit of the company. Deloitte was subsequently hired as that auditor.

....

[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

Sphere: Related Content

Tuesday, August 24, 2010

Looking Long Into China-Biotics

By Eric Jackson
RealMoney Contributor

8/23/2010 5:12 PM EDT
Click here for more stories by Eric Jackson


Although its price has come down since the spring (along with many other Chinese names), China-Biotics(CHBT - commentary - Trade Now) continues to be a favorite long position of mine. It is still performing well and it is worth owning.

The company is one of the leading probiotics producers in China, serving both the retail market as well as the bulk markets for the dairy (e.g., yogurt) and animal-feed industries. Asia's growing probiotics industry is expected to hit $9 billion by 2014.

Within China, China-Biotics is one of only a few large suppliers of probiotics. As a result, China is forces to be a net importer of probiotics. Large European companies are still key sellers into the Chinese probiotics market. However, players like China-Biotics are growing.

The company's revenue and earnings keep improving. China-Biotics' trailing-12-month revenue figure stands at more than $90 million, and it has a 61% quarterly growth rate. Its net income for the last year is $29 million, up 226% from the previous year.

Investors who know nothing about probiotics are usually struck by China-Biotics' operating margins (over 44%) and its large amount of cash on hand ($160 million). The company's cash represents over half of its market capitalization.

Some investors look at these results and immediately see a huge value opportunity. Others, however, see these numbers as a red flag -- a sign that must be something wrong. It's because of this second camp of investors that there has been such a high short interest in China-Biotics as of July 15 (it was almost 23% of the company's public float).

If 23% sounds like an enormous short position to you, that's because it is. When I have discussed a short position I currently have in Tesla Motors (TSLA - commentary - Trade Now), potential investors have expressed concern about that company's short interest of 13%. (But with a market capitalization of more than $1.7 billion vs. China-Biotics' $321 million, Tesla's greater liquidity makes it easier on short traders when the time comes for them to cover their positions).

....

[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

Sphere: Related Content

Monday, August 23, 2010

Ironfire Capital Resolution Submitted to Microsoft on August 23, 2010

Ironfire Capital has submitted the following resolution to Microsoft on August 23, 2010. It is our hope that Microsoft will allow its shareholders to vote on it at the planned November shareholders' meeting.

Sphere: Related Content

Thursday, August 19, 2010

A Peruvian Bank Offers Stable Growth

By Eric Jackson
RealMoney Contributor

8/19/2010 12:22 PM EDT
Click here for more stories by Eric Jackson

Banks have scared many investors this year. Just when we thought it was safe to wade back in the waters of U.S. banks earlier this year, we got smacked over the head with news of increased jobless claims and fears of a double-dip recession, which would cause more loan and mortgage defaults. European banks have been a horror show of volatility all year.

However, there are some good banks out there, and banks -- let's face it -- have one of the greatest business models in the world for making money.

One bank that has really performed well over the past three years is Credicorp (BAP -commentary - Trade Now), which is based in Lima, Peru.

Since the start of 2007, Credicorp is up 147% while the S&P 500 is down 22%.

It's still got a good growth story in front of it. The bank has a market capitalization of just under $8 billion, so this is nowhere near the size of the big international bank behemoths like Citigroup (C -commentary - Trade Now) or Bank of America (BAC - commentary - Trade Now).

Credicorp has been sticking to its knitting of lending in Peru and in neighboring Latin American countries. So an investment in Credicorp is a proxy investment in the continued growth of Latin America. As companies thrive and go back to Credicorp for new loans for new expansion, the bank benefits.

And while U.S. and European banks will be deleveraging for many years to come to clean up their balance sheets, Credicorp is a pleasant stroll down memory lane for many investors who remember what it was like to invest in small, aggressive U.S. banks with clean balance sheets 20 years ago.

Credicorp has $3.5 billion in cash on hand, as of the end of last quarter, and only $3.8 billion in debt. Compare that with Wells Fargo (WFC - commentary - Trade Now), which has $137 billion in cash and $230 billion in debt.

....

[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]


Sphere: Related Content

Intel Is Desperate for Growth

By Eric Jackson, Senior Contributor08/19/10 - 10:54 AM EDT


Stock quotes in this article:INTC, MFE, SYMC, MSFT, ORCL,GOOG

This morning's announcement that Intel(INTC) will purchaseMcAfee(MFE) for $48 -- a 60% premium over yesterday's close -- is a bit of a head-scratcher.

It's hard to understand the logic for why a chip company needs to own a pure-play software company protecting PCs from viruses. There has been speculation before about which companies eventually might swoop in and buy either McAfee or Symantec(SYMC), but it was usually other big software companies -- names like Microsoft(MSFT), IBM(IBM), orOracle(ORCL) were commonly mentioned. Even Google(GOOG) has been mentioned as they have tried to build up their Google Apps offering to more seriously compete against Microsoft.

To my knowledge, no one has ever mentioned Intel before as a potential buyer.

So, why are they doing it?

1. They have the cash. In their most recent quarter, they had more than $18 billion in cash burning a hole in their jeans. And, remember, this is atech company that's paying a decent forward dividend yield north of 3%.

2. They want to show more growth. This is likely more important in the eyes of Intel. This big-chip company's future success as a stock is based on its ability to continue to grow its top-line. With the PC market potentially set to take a pause, Intel's growth story is imperiled. Therefore, why not grab a high-margin software business that's running in a duopoly to pad the numbers.

I don't think it makes much strategic sense. It's likely that McAfee will be a bolt-on acquisition, where the stand-alone subsidiary continues to operate as it did as a stand-alone business with very little synergies with their new parent.

In fact, we might want to pencil in to our calendars five years from now, when Intel will likely spin-out the former McAfee division to "increase shareholder value."

So, this purchase is about Intel's desperation. But, more important in my eyes, is how this move might signal that many of those other large companies mentioned above might also start to act/react in the same way to the same problem.

We've talked about the living dead tech companies that are small and have no future without getting bought. We've also talked about all the cash the biggest companies have been stock-piling over the past couple of years. Yet, there hasn't yet been a big M&A consolidation.

We thought Oracle was going to lead the charge, but even they have cooled off of late. We could finally be ready to see some moves -- and they could be big and stupid moves like Intel's today.

........

[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

Sphere: Related Content

Wednesday, August 18, 2010

Why Tesla Is the Next Webvan

By Eric Jackson08/18/10 - 06:59 AM EDT


Every 10 years ago, the smart folks in Silicon Valley select some inefficient industry that is run by dummies which they are going to set straight and end up revolutionizing. Ten years ago, there were smart entrepreneurs (with Internet backgrounds) with even smarter venture capitalists behind them who started a company called Webvan designed to revolutionize buying groceries. People would no longer go to a bricks-and-mortar store, they said, they'd buy all their groceries online.

After raising hundreds of millions of dollars and going public, Webvan failed. The smart Web entrepreneursoverlooked some basics about running a grocery business -- online or offline -- like needing to have big expensive distribution centers. Maybe if they'd had some grocery execs in the fold (on the management team or board) they might have thought of that "key success factor" for operating in that industry. But before their failure, if you'd asked them about bringing in some industry talent, their response had been: we're trying to recreate this industry so we don't want to tie ourselves down to the old ideas that have failed.

Ah, how important it is to balance "fresh eyes" to look at industry challenges anew with "gray hair" wisdom that can tell you which potholes to avoid stepping into.

In Silicon Valley, with lots of money, ego, and talent, you can will a lot of companies into reality -- especially if they are able to capture some exciting buzz. However, success breeds lots of arrogance. Webvan was Exhibit A of how that arrogance can result in a high-profile failure.

There's another Webvan-like company that just went public a few weeks ago and is heading for the same kind of ignominious failure by the end of 2012: Tesla Motors (TSLA).

Tesla shares many similar characteristics with Webvan. The company was founded in 2003 with the view of providing the world's leading electric cars. You could argue that they've been losing money ever since. The company is set on revolutionizing the auto industry.

By 2004, they needed cash and found Elon Musk, a PayPal co-founder with cash in his jeans since eBay(EBAY) acquired it. Musk, 39, is now Chairman, CEO, and Product Architect of Tesla. He has an explicit employment contract which will keep him in that role until the end of 2012.

The company -- thanks to Musk's involvement, his worthwhile mission of creating non-fossil fuel powered cars, and the pixie dust he brought of his past PayPal success -- found it easy to raise money in Silicon Valley. They attracted investments from Google(GOOG) co-founders Sergey Brin and Larry Page, eBay co-founder Jeff Skoll and a host of well-know VC firms. Most people are familiar with its racy Roadster -- currently Tesla's only car with a list price of over $100,000.

........

[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

Sphere: Related Content

Tuesday, August 17, 2010

Never Discount the Grumbling Workers

By Eric Jackson
RealMoney Contributor

8/17/2010 7:30 AM EDT
Click here for more stories by Eric Jackson


The whole Hewlett-Packard (HPQ -commentary - Trade Now) affair continues to make the business pages look like Us Weekly, with new details having emerged over the weekend. It seems former CEO Mark Hurd settled his sexual harassment case with his one-time dinner companion and HP marketing person the day before HP's outside counsel was set to interview her for the first time. As a result, Hurd lost the trust of the board, which felt as though he was acting to limit what details they could learn from her.

Setting aside these more salacious details, I thought the most interesting new information came from Joe Nocera of The New York TimesFriday. In his column, Nocera suggests the real reason Hurd was shunted aside was that he'd lost the trust and respect of the HP employees, and that charges of sexual harassment and inflated expenses merely masked that fact. Nocera illustrates this with some damning faint praise for Hurd from analysts and HP employees, both former and current:

  • "He was a cost-cutter who indulged himself."
  • "Mr. Hurd cares about one thing, how much money is in it for him. As an HP employee I see it every day. We don't have the tools to do our job, but he isn't doing without anything and doesn't care."
  • "He didn't have the support of his people. . . . he seemed to be the only one benefiting from HP's success"
  • "I was delighted [to see Hurd go] ."
  • " . . . he lacks the moral character to be CEO."

I believe these latest revelations show board did lose trust in Hurd, thus providing reason to suggest he move on. However, I also believe Nocera has put his finger on a critical point: namely, the depth of HP employees' resentment toward Hurd for well over a year. About a year ago, for instance, I wrote about my belief that Hurd was not such a great CEOas what was portrayed by Wall Street analysts and investors -- and I remember being very surprised at the immediate and strong reaction I got from then-current HP employees. They were all united in their antipathy for Hurd.

They complained about how he'd cut the business to the bone but didn't have any ability to grow the company's revenues. They talked about his hypocrisy in forcing 5% across-the-board paycuts while doubling, tripling, or quadrupling senior executives' total compensation in the same year. Most of all, they complained of Hurd's total inability to connect with HP employees and a disregard for the vaunted "HP Way" of the past.

....

[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

Sphere: Related Content

Sunday, August 15, 2010

Five Ways Yahoo! Could Redeem Itself

By Eric Jackson
RealMoney Contributor

8/13/2010 11:25 AM EDT
Click here for more stories by Eric Jackson


Yesterday I read a fantastic analysis of the reasons Yahoo! (YHOO - commentary - Trade Now) has been stuck in the mud for 12 years now. The piece was authored by Paul Graham, who once sold his start-up to Yahoo! and then spent time working for the company.

Graham points out that Yahoo! has had a couple of particularly fatal flaws over the years.

First, the company made too much money from the likes of Procter & Gamble (PG -commentary - Trade Now) and Internet startups with dumb venture-capital cash as they were overpaid for worthless banner ads. Why innovate with something like AdWords when you're making stupid money?

The fact that it was doing so well in the early days, ventures Graham, is why it never felt compelled to seriously develop search (or to buy Google(GOOG - commentary - Trade Now), for that matter), as this seemed like such a small market compared to that of Internet portals.

Another point Graham makes is that Yahoo! never wanted to be a technology company -- and, as such, it brushed off hardcore technology types who were, in turn, were never compelled to stay at the company.

Graham's piece does shed some light on what the thinking in Sunnyvale, Calif., has been for more than a decade now. Still, it's sort of like understanding the logic of a drug addict. How do you make sense of nonsense?

We all know that Yahoo! slipped into Alice in Wonderland some time ago. It used to be that people speculated about what Yahoo! needed to do to turn itself around. Now, with Carol Bartz on the job, you don't hear even that -- just apathy and more Yahoo! people quitting.

So, what are the things that an investor should look for as signs that it's time to enter a long position in the stock?

  • A revamping of the board. Following the shameful rejection of Microsoft's (MSFT - commentary -Trade Now) $34-per-share buyout offer a couple of years ago, it will only be safe to own the stock again once all the directors responsible step down, in my opinion. Until then, I think Roy Bostock, Art Kern, VJ Joshi, and Gary Wilson, and Eric Hippeau should be reminded that they have embarrassed themselves with their out-of-touch actions.
  • Clarity on what this company is and what it wants to be. Carol Bartz has been asked this question at least twice over the past year, and she's provided miserable responses. She may be a cost-cutter, but she has no clue what she's trying to build at Yahoo!. It's perfectly fine if she just wants to do a little bit of this and a little bit of that, but she should state that clearly instead of letting people guess.
  • ....

  • [*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

Sphere: Related Content

Wednesday, August 11, 2010

Steer Clear of HP Until Next CEO

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.

I agree that HP has a good set of businesses that are market-leading. There are several scenarios I could envision in which it will hire a great new CEO who is able to ramp up this company and its stock price in the coming years. We could well look back on this moment in time and say it was a great time to enter the stock.

However, there are way too many question marks and risks hanging over the company at the moment to jump into a long position. The risk/reward -- as of today -- still strikes me as unattractive to get long the stock. If they make a bad hire as CEO, the stock could be an attractive short opportunity.

So, here are the reasons for not touching HP at the moment:

  • 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.

    Now that Hurd is out of HP, the HP bulls are saying the company is bigger than Hurd. Yet, when Hurd was around, they only wanted to talk about HP as if he was the only employee at the company. Hurd is all about execution, we used to hear them say. So, if Hurd is now gone, how will HP execute?

    Companies are more than their leaders but they model themselves to their leaders and they drift with no leaders. We're in a drift-zone until a new CEO is announced and that took seven weeks after Carly was sacked.

  • 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."

    As I said in my article on Saturday, HP's stock went up 137% in the first 2.5 years of Hurd's tenure but dropped 20% in the last 2.5 years. Over the same most recent 2.5 years, IBM's (IBM) stock went up 20%. If you think you can always rely on HP to deliver stock growth, you're wrong.

But let me emphasize the top three reasons for not owning HP at the moment:

  • 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.

    The current expenses allegations that the board used to unanimously ask him to resign are entirely consistent with those reported facts. What it tells me is that this is a guy who has entitlement issues: $43 million in total comp in 2008 wasn't enough for him. He also needed every last penny of expenses covered for him -- even when they were for personal expenses.

    I've tended to find that people who fib about the small stuff tend to fib about the big stuff -- like all the micro (and legal) decisions that go into managing the numbers every quarter. We might have a few more dead bodies which will soon wash ashore from the EDS, 3Com and Palm acquisitions.

    I smell one-time charges coming from excessive earnings management that might have gone on over the past three years. Usually, when a new CEO comes in, once they get a sense of the books and how the past regime has run those books, they like to put everything into the kitchen sink so they can free themselves from the burdens of how they've done things in the past.

  • 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.

    Is this the new stream-lined HP or the old bureaucratic HP that's never really changed since Carly? I think it's likely there will be more charges ahead.

The HP bulls like to point out that the company raised full-year guidance when it announced Hurd was leaving on Friday. I'm surprised it also didn't announce that it was doing a stock buyback. This upped guidance doesn't do anything to change my view at all. HP's been sandbagging - precisely so it could up the guidance when it needed to (as it did in reaction to this scandal).

In my view, this stock won't trade on rest-of-the-year guidance but as for what its earnings will be in 2011 and 2012, the jury's still out on that.

Do you trust this HP board to be on the ball and hire a great new CEO? Take a wait and see approach.

........

[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]


Sphere: Related Content