| BUSINESSWEEK ONLINE : AUGUST 2, 1999 ISSUE | ||||||||
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| COVER STORY
HP's Stock Rocket Will Need Some Refueling When Hewlett-Packard (HWP) announced on July 19 that it had hired Carly Fiorina as its new president and CEO, its stock price climbed nearly three points to reach a new high of 118 7/16. It hasn't traded that high since. HP closed on July 22 at 105 1/4, after plunging 7 5/16 points in a punishing day for all technology stocks. It's not that Wall Street has any doubts about Fiorina. Merrill Lynch analyst Steven Milunovich called her "an excellent pick," in a July 19 research note. And Bear Stearns analyst Andy Neff upgraded the stock that day on enthusiasm at her appointment. Analysts believe Fiorina, a former Lucent exec, will bring new ideas and a fresh outlook to a company considered somewhat stodgy and weighed down by bureaucracy. "I think she will bring to the culture a greater sense of urgency," says Brown Brothers Harriman analyst Bill Milton. He expects Fiorina to bulk up the services business and speed the flow of innovation from HP Labs to the company's computing and printer units. Analysts are also pleased that board member Richard Hackborn has agreed to become chairman at Fiorina's request. "Mr. Hackborn is considered one of the best thinkers in the industry and a legend," writes Milunovich. "ROOM TO GIVE." Why then the stock slide? HP has faltered for much the same reason the entire tech sector has stumbled in recent days. In a nutshell, investors believe much of the good news is out, and they're taking profits after a few months of strong returns (it sure didn't help on July 22 that Fed Chairman Alan Greenspan indicated he would raise interest rates at the first whiff of inflation). HP's stock has come very far, very fast in the past six months. Despite the recent setback, it's up about 60% year-to-date. "I think the stock had some room to give back," says Richard Moroney, co-portfolio manager of the Strong Dow 30 Value Fund (SDOWX). Once one of the cheapest stocks in the Dow Jones industrial average, its p-e had moved up to the high end of its usual range (about 28 times 2000 earnings estimates). Moroney says he wouldn't add to his position unless HP got down to $95 a share. "We're just going to sit with what we have," he says. "Prospects are pretty bright." Part of the problem with the stock now is that there may not be much in the way of promising developments in the near term. The next earnings report isn't until mid-August. And Milton believes changes Fiorina implements won't show up in financial results for about a year. He says new CEO told analysts she would have more specifics in December, at the biannual analyst meeting -- which seems a long way off. "This is not like IBM when Gerstner came in," says Milton. "Earnings are growing and [HP] has a credible strategy in place." On May 17, HP reported second-quarter earnings of $918 million, or 88 cents per share, up 34% from the prior year. Revenues were $12.4 billion, up only 3% from the year-earlier period, but order growth was 10% higher in the quarter. "The stock is getting rich given that HP is just now getting back into double-digit revenue growth," Milunovich wrote on July 19, reiterating his accumulate ranking, but raising his price target to $125. GREAT COMMUNICATOR. But changing HP's stodgy public image could go a long way toward attracting more investors, believes Mona Eraiba, an analyst with Gruntal who rates the stock a strong buy. That's where Fiorina could make a big difference. "I think the new CEO will improve the profile of the company with customers, shareholders and media," she says. "I think the stock was undervalued in the beginning of the year in a major way, and its public image was too blame." With Fiorina, who's considered a great communicator, taking over, Eraiba believes HP's image -- and stock price -- will make strides. Also, later in the year, HP will be spinning off its measurement business, which ABN AMRO analyst David Wu thinks could spur the stock. Instead of being a "Rodney Dangerfield" part of HP that doesn't get any respect, he thinks the testing and measurement business will blossom on its own, the way Lucent took off when spun off from AT&T and Lexmark took off once spun off from IBM (see BW Online 7/21, "Long Term, Buying Lexmark Could Be Like Printing Money"). "I don't see why HP's measurement company will be any different," he says. And since HP will still own 85% of the company, its shareholders should benefit Of course, other concerns are looming in high technology. Some analysts fear a Y2K-related slowdown. And competition remains cutthroat as prices of PCs and printers continue to fall. It's not surprising that some investors with a trading mentality are taking some profits in HP now, says Moroney. But for long-term investors, he says, this is no time to sell. By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 RELATED ITEMS HP's Carly Fiorina: The Boss COVER IMAGE: The Boss RESUME: Cara Carleton S. Fiorina PHOTO: Carly Fiorina, as a Child CHART: Profits May Rebound...And Sales Should Rise...So HP Shares Are Surging TABLE: Making a New HP Way TABLE: HP's Executive Branch TABLE: Leadership over the Years Online Original: Lew Platt on HP's Ups and Downs--and the HP Way Online Original: Why Fiorina Convinced "an Icon" to Become Chairman Online Original: HP's Stock Rocket Will Need Some Refueling INTERACT E-Mail to Business Week Online | |||
