HP's Hurd Is About to Be Tested

After a sterling three-year run, the company's CEO faces a weaker PC market and a stronger Dell

by Louise Lee

Browse Issues

Browse the BusinessWeek Archive

Fiorina clashed with the board Seth Wenig/AP Photo

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• digg this
• save to del.icio.us

Jason Seiler

W. Shannon Reid has been a fan of Mark V. Hurd ever since Hurd took over as chief executive at Hewlett-Packard (HPQ) three years ago. But last month, the portfolio manager at the Evergreen Strategic Growth (ESGIX) fund cut back on his fund's holdings in HP. He trimmed the stake at the end of December from 3.3% of his fund, or 651,470 shares, to 2.9%, because of concerns over how Hurd will fare in the year ahead. "There's no question that [2008] will be his most challenging year," says Reid.

Hurd took over HP in March, 2005, at a tumultuous time. The company had struggled under his predecessor, Carleton S. Fiorina, and she was ultimately dismissed after clashing with the board over how to improve HP's performance. Hurd moved quickly to quell the drama and put the tech giant back on track. He cut costs and got operations humming, helping the company boost profits by 17% last year, to $7.3 billion, as revenues rose 14%, to $104 billion. From the day Hurd was named chief executive until the end of 2007, HP's stock surged 132%, about five times the return of the Standard & Poor's 500-stock index.

The reasons this year could prove so tough for Hurd are adding up. Tech spending is slowing amid an economic downturn in the U.S. and other countries. Archrival Dell (DELL) looks to be regaining its footing after stumbling badly in recent years, making it tougher to pick up share in key markets. And Hurd has fewer opportunities to boost margins and profits because of the cost cuts and operational improvements he has already undertaken. "He has done a good job in his first few years," says Reid, whose fund is part of Wachovia's (WB) Evergreen Investments, with $284 billion under management. "You always take on the easier tasks first, so it's going to get harder."

Hurd's operational strength may take HP only so far. This year he'll be under pressure to demonstrate that he can also be a visionary leader, capable of picking out the technology trends that will lead to strong growth opportunities in the future. "The first three years of his tenure have been about profit growth through cost-cutting and restructuring and raising efficiencies," says Frank Gillett, analyst at Forrester Research (FORR). "HP is entering a phase where it needs to get future profit growth from sales growth and not cost-cutting."

Plenty of investors are keeping their HP shares, even adding to them, but a few, like Reid, are cutting back. Among those that sold all or substantial chunks of their holdings in the fourth quarter are Goldman Sachs, Capital Research & Management, Iridian Asset Management, and Berkeley Capital, according to filings with the Securities & Exchange Commission. All four declined to comment for this story.

The first evidence of HP's performance will come on Feb. 19, when the company reports results for its first fiscal quarter. Analysts expect HP to boost net income by 35%, to $2.1 billion, on a 10% increase in revenues, to $27.5 billion. In the wake of tepid forecasts from bellwethers such as Cisco Systems (CSCO), investors will be watching closely for any sign that Hurd sees a slowdown ahead. Already, HP shares have slid 11.3% this year, compared with the 6.9% drop in the S&P 500.

"A HIGH DEGREE OF CONVICTION"

HP declined to make executives available to comment for this story because of the upcoming earnings announcement. But in an interview in December, Hurd made it clear that he's determined to keep the pipeline stocked with promising new products and services. He's investing in new innovations in the company's core PC, printer, and enterprise businesses, and he sees genuine opportunities in completely new fields. "