Why I'm Betting on Hewlett-Packard
Hewlett-Packard's PC market share is temporarily depressed and likely to bounce back in 2012.
As both an investor and consumer, I worship at the Apple (AAPL) altar, typically happy to sneer at the outside world with its Windows PCs and Android phones.
So frankly, I surprised myself when I spotted what seemed like an ideal opportunity to hit the buy button on Hewlett-Packard (HPQ) this morning following yesterday's lousy first-quarter earnings report.
Note: This is a small, risk-defined bullish options position, at least for now -- not a no-guts, no-glory type of move.
So let's look at what's going on.
HP's revenue fell 7% year-over-year to $30 billion, missing analysts' expectations by about 2%. Earnings, however, were a nickel above consensus at $0.92 per share.
For the second quarter, the company said it expects to earn $0.88 to $0.91 per share, which is well below Wall Street's average forecast of $0.95. The company did reaffirm full-year earnings guidance of $4.00 per share, though judging by the price action in HP shares this morning, no one's buying it.
So let's look at what's went wrong with HP.
The number-one negative for HP during the quarter was a 15% revenue decline in its Personal Systems Group, driven by a massive 18% decline in PC unit sales.
However, this wasn't surprising given that Gartner's January 11 PC industry sales report indicated a 16% decline in HP unit sales during the fourth quarter of 2011. This was much, much worse than the industry's 1.4% decline, and downright pathetic compared to the 26% gain Apple experienced in its own December quarter.
HP's fiscal-first quarter covered November through January, while Gartner's report covered October through December, but you get the point -- it's been well-known that HP was in lousy shape.
Now, HP's had two major obstacles for its PC business.
The first is former CEO Leo Apotheker's decision (later rescinded by current CEO Meg Whitman) to sell or spin off HP's PC business last year. That move sent a very bad message to HP's customer base and injected a great deal of uncertainty into corporate and consumer computer buyers.
As time goes on, that uncertainty should disappear or at least dissipate.
Secondly, there's the Thailand floods, which cut down hard-drive supplies and boosted hard-drive prices.
Now, I've been of the view that the impact of the floods hasn't been quite as big as PC companies have claimed, primarily because PC unit sales were lousy before the floods hit in October.
Just take a look at this handy-dandy chart showing year-over-year PC growth during 2011:
Nonetheless, regardless of the size of Thailand's overall impact, it appears that HP took a disproportionately big hit, at least relative to its key US competitors, Dell (DELL) and Apple.
As we learned Tuesday afternoon, Dell's PC revenues were up fractionally, and we've known since January that Apple's were up huge.
Perhaps HP's supply-chain team somehow dropped the ball when it came to procuring hard drives?
Either way, I think that HP's market share is temporarily depressed and likely to bounce back later in the year, and I want my money in before that happens.
One big positive to HP's just-plain-lousy 2011, is that year-over-year comps will be pretty easy in late 2012 when hard-drive supplies are fully back online.
Furthermore, if -- and I'll admit this is a big if, especially coming from my Apple-loving mouth -- the market gets really excited about Microsoft's (MSFT) upcoming Windows 8 operating system, HP should directly benefit as investors look for ancillary plays. For now, there are definitely signs of life in the PC complex as key members of the supply chain like Intel (INTC) and NVIDIA (NVDA) have been quite strong this year.
I'll end with a quick word on catching falling knives: As I stated above, this is a small position, and I used options to define my downside risk. Picking bottoms in struggling stocks is extraordinarily difficult, so in these types of situations, it makes sense to tread carefully and use stops.
And on a random note, Lions Gate (LGF) is off to the races, up 8%+ this week alone as anticipation for The Hunger Games continues to skyrocket.
Advance ticket sales commenced yesterday, and Fandango reported that 83% of its ticket sales for the day were for THG, which bodes well for the opening box office.
Strong initial demand for the just-released Twilight: Breaking Dawn Part 1 DVD is certainly boosting sentiment as well. (See: 'Twilight' and 'The Hunger Games' Put the Odds in Lions Gate's Favor)
Lions Gate is a wacky, volatile stock, but since I've already locked in plenty of gains (unfortunately at lower prices...), I'm content to ride the momentum for now.
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