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.**]

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The HP Horse Doesn't Want to Run for this Jockey

My post a few weeks ago on Mark Hurd's perks at HP has generated a lot of traffic and email comments -- especially from current or former HP/EDS employees.

Here is a link from one ex-EDS'er in Germany upset at the way things have played out.

Of course, every business needs to find a way to cut costs and save -- especially in the current environment -- but there's clearly a large portion of HP employees who feel very upset at the way Hurd and HP management have gone about their cost-savings drive. Preaching cost cuts to the troops, and then turning around and living high off the hog themselves at the expense of shareholders.

I remember one time going to an HP meeting when I worked for a software company while Carly was still CEO. The meeting was at an old DEC facility in Nashua, NH. I remember it took about 10 minutes to walk from the guest entrance desk to the meeting room. Along the way, I passed dozens and dozens of empty cubicles, as jobs had been "rationalized" away elsewhere. When I finally got to the meeting room, the HP folks were all very smart and friendly, but I remember being amazed that we spent a good 15 minutes or so of small talk time discussing what an embarrassment Carly was as a CEO. I remember leaving the meeting thinking: "great people but that company is in trouble if that's how all the employees feel about their boss."

These recent comments I've received back from employees about Hurd remind me of that meeting again.

I'm sure Hurd would say these are disgruntled employees who don't get the need for "cost cutting." They don't understand the new competitive global environment we operate in, etc. etc. He probably would also say all this employee grousing will go away when the stock starts going back up again. In fact, at a recent analysts' day, he touted that HP was going to grow "faster than the market" in 2010.

Maybe. But I don't buy it. I sense deep anger and lack of trust among the rank and file with Hurd and his team. I get a sense of Hurd being the jockey on a horse that's decided it doesn't want to run any more for this jockey. He can whip it all he wants, but that horse is not going to run.

Let's see how HP's stock does next year and if it does grow faster than the market.

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US News: Why CEOs Survive Recession Better Than Others

By Rick Newman

Posted: September 24, 2009

It's good to be CEO, even in a recession. Especially in a recession.

Hewlett-Packard's stock price

fell 29 percent in 2008, and the company announced plans to lay off 25,000 workers after it acquired Electronic Data Systems. But CEO Mark Hurd didn't feel the pain. Hurd earned $43 million in 2008, a 73 percent raise from his 2007 pay. Perks included $136,000 worth of personal travel on corporate jets, paid for by shareholders, and $7,472 in travel expenses for Hurd's family, according to an analysis of HP's annual proxy filings by shareholder activist Eric Jackson. Several other top HP executives earning multimillion-dollar pay got double- or triple-digit raises.

[See 10 gaffes by doomed CEOs.]

Hurd has been a strong CEO since he took over in 2005, generally credited with enhancing HP's profitability after a period of drift. But the big pay hikes during a dismal year are generating some of the toughest criticism of Hurd's tenure. "There are some very troubling aspects about how he, his management team and his board approach executive compensation and governance," writes Jackson. "Investors

should steer clear of this Silicon Valley icon until it gets its act together."

For all the talk of reining in CEO pay and enacting financial reform—even from some CEOs themselves—it's beginning to appear that very little has changed in the way companies are run and executives get paid. A new survey of CEO pay by research firm the Corporate Library finds that median take-home pay among more than 2,000 CEOs fell by 6.4 percent from 2007 to 2008, the first time on record that CEO pay has gone down instead of up. But that was in a year in which the stock market fell by 37 percent and the economy lost 2.6 million jobs. By almost every measure, the vast majority of companies performed far worse in 2008 than in 2007. "While the downturn has affected pay, the link between pay and performance remains weak," says the report. "Such a minimal decline in pay given the massive decline in shareholder value is hardly an adequate response."

A surprising number of CEOs didn't personally experience the downturn at all. Of 100 industries tracked by the Corporate Library, median CEO pay went up in 40. The 10 highest-paid CEOs included seven from the oil industry, which had a banner year as gasoline prices hit $4 per gallon. The others were Stephen Schwarzman of the Blackstone Group, Larry Ellison of Oracle, and Michael Jeffries of Abercrombie & Fitch. Schwarzman earned the most: $702 million. No. 10 Jeffries earned $72 million.

[See how to pay CEOs what they're worth.]

Reformers want to see much tougher rules linking executive pay to the long-term performance of their companies, and a few CEOs took a step in this direction. Lloyd Blankfein of Goldman Sachs endured a 97 percent pay cut in 2008, because the tony Wall Street firm rescinded bonuses for top executives. Jamie Dimon of JPMorgan Chase went without a bonus as well, resulting in a 92 percent pay cut. But both of those companies were big bailout recipients under the microscope of politicians and regulators. And both have paid back all their bailout money, which means Blankfein and Dimon will probably do a bit better in 2009.

[Get ready for the miraculous hollow economy!]

It's likely that overall CEO pay will bounce right back up in 2009 as well. Many CEOs earn a relatively low base salary, with the majority of their total compensation coming from bonuses, company stock, or options to buy stock. The plunge in the stock market last year means the value of CEO-owned stock fell as well, and many CEOs declined to exercise options to sell stock since prices were so low. That has changed in 2009, with the market up smartly. It could even turn out to be a record year for CEO pay raises, as they springboard off of last year's lows. At least somebody's getting ahead.

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Hurd's Palate Should Concern H-P Shareholders

From RealMoney.com

By Eric Jackson

1/26/2009 12:29 PM EST

You'd be hard-pressed to find a CEO who since arriving at the top spot has been as admired as Mark Hurd of Hewlett Packard (HPQ - commentary - Cramer's Take). The stock is up 80% since he was hired in March 2005, recovering from years of wilt under Carly "all flash, no substance" Fiorina. Over the same period, archrival IBM's (IBM - commentary - Cramer's Take) stock has declined 1% and the NASDAQ has fallen 26%.

Hurd has kept a low profile while underpromising and overdelivering. Quarterly beating of estimates has become the norm for H-P. However, a big red flag for investors popped up last week in the company's most recent proxy filing with the SEC.

As discovered by Michelle Leder of Footnoted.org, on page 47 of the proxy filing, in addition to his $23.3 million in total compensation last year, Hurd received "an other gross-up" of $79,814, which "represents amounts reimbursed to the NEOs for taxes on meals associated with business travel undertaken by the NEOs in connection with events to which family members were invited."

Based on disclosures elsewhere in the proxy, Leder estimated the "gross-up" meant Hurd and his family ate over $243,000 worth of food last year on shareholders' dime. I don't know how that is possible for a family to do, even assuming they dine at the finest restaurants in the land.

After this news bounced around several media outlets last week, H-P issued a statement to Silicon Alley Insider:

The tax gross-up figures contained in H-P's 2009 proxy were miscalculated. The correct "other gross-up" figure for Mark Hurd was $4,117 (not $79,814), which is in-line with last year's figures. Notwithstanding this, some media outlets inaccurately extrapolated the supposed tax rate, resulting in vastly inflated and inaccurate figures for Mark's meals. While this is not a material disclosure, we wanted to set the record straight.

If Hurd and his family really charged over $200,000 in meals last year to H-P's shareholders, it is a major heads-up, especially in the wake of Merrill Lynch CEO John Thain's $1.2 million personal office renovation. In a TheStreet.com opinion column last week, I wrote there were few warning signs of selfish spending prior to Thain's ultimately rejected request for a $30 million to $40 million bonus for 2008, followed by his rushing up Merrill Lynch's year-end bonuses to December and only decreasing them by 6% from the previous year.

In the case of Hurd -- if the original proxy is correct -- this is a warning that he thinks it's OK to charge a few personal things here and there to H-P shareholders. After all, hasn't he increased the shares by 80%, far outpacing his peers, since he took over as CEO? As we learned at Enron, Tyco (TEL - commentary - Cramer's Take), WorldCom and Adelphia , it's that type of thinking that causes corporate leaders to ultimately take one step too far and dramatically cripple or kill the company.

But what if the H-P PR people are right and erroneously inflated the number 19 times in the SEC filing? It's hard to believe the accountants would make such a mistake, but if they did, as in the case of Broadridge, it makes you wonder what other reports to the SEC might have been wrong. It wouldn't give me any more confidence as a shareholder, than if Hurd's family had taken advantage of shareholders.

It reminds me of the terrible blunder made in the counting of Yahoo! (YHOO - commentary - Cramer's Take) shareholder votes at last August's annual meeting. Initially, tabulation company Broadridge Financial Solutions (BR - commentary - Cramer's Take) reported that Yahoo!'s directors had received much higher levels of shareholder support than in 2007. Reporters painted the entire annual meeting as a ho-hum affair, suggesting that reports of shareholder discontent prior to the meeting were overstated.

A few days later, Gordon Crawford of Capital Research Global Investors, one of Yahoo!'s largest and most influential shareholders, challenged the veracity of the reported numbers. It turned out that Broadridge had forgotten to add 200,000 shares for some directors and 100,000 for others. When the company corrected this error, several Yahoo! directors had much higher "against" votes than originally reported (40% versus 20% in the case of Chairman Roy Bostock).

You wonder what would have happened had Crawford not kicked up a fuss? Probably nothing, which makes you wonder how often this happens.

In addition, no revised filing has been sent to the SEC. Just a simple "Whoops -- we messed up" apology is all H-P had to issue for this story to go away.

Will the new SEC headed by Mary Schapiro not give out penalties for mistakes in filings? Surely the public deserves to know that the public company financials on the SEC's EDGAR website are accurate. And why did it take a blogger to uncover all of this? Where were the research analysts working to uncover what was really going on for the benefit of investors?

Whether H-P has a problem doing its numbers or with food expense budgeting, shareholders have seen a bright red flag. At the same time, H-P is trying to digest a slower and less profitable company in EDS, purchased for $14 billion in early 2008. In the next quarter or two, it wouldn't be surprising to get a warning from H-P about cost overruns or expected synergistic revenues that have not materialized.

There will likely be pain in 2009 for H-P shareholders. It would be wise to stay clear until the company shows it has its arms around the new acquisition and is treating its shareholders fairly.

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