TABLE OF CONTENTS
EXECUTIVE SUMMARY……………………………………………………………
7
INTRODUCTION……………………………………………………..……….………
7
The Hewlett-Packard Company……………………………………………….
7
Hewlett-Packard Company Background……………………………………...
8
Hewlett-Packard Products and Services………………………………………
11
Hewlett-Packard Management and Leadership………………………………
13
Hewlett-Packard Mission, Goals, and Objectives...…………………….…..…
14
Hewlett-Packard Vision…...……………………………………………….……
15
Hewlett-Packard Cultural Business Values………..……………………..……
16
Hewlett-Packard Cultural Business Ethics………………………………..……
17
Hewlett-Packard Industry Competition………………………………….…….
17
Hewlett-Packard Competitive Strategies………………………………….……
18
Hewlett-Packard Growth and Market Position; Sales and Assets……………
20
Hewlett-Packard Social Responsibility………………………………….………
20
MARKET OUTLOOK………………………………………………..……….………
21
Introduction to the Stock Market……..………………………………….………
21
Historical Performance………………..………………………………….……… 25
Future Outlook………………………...………………………………….……… 28
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INDUSTRY OUTLOOK………………………………………………..……….……… 30
Nature of the Industry……………………….………………………………..…… 30
Type of Composition……………………..………………………………….……. 31
Average Industry Growth………………………………………………….……
31
Opportunities and Threats in the Industry………………………….……………
33
Future Outlook…….………………….………………………………….………
34
FINANCIAL STATEMENT ANALYSIS……………………………..……….……… 35
General Discussion of HP Financial Statements………………………….……… 35
Financial Ratios……....………………..………………………………….……… 42
Common Size Statements……………..………………………………….……… 42
Cash Flow Analysis……………..………………………………..……….……… 46
STRENGTHS AND WEAKNESSES ANALYSIS………..…………..……….……… 47
Financial Ratio to Industry Analysis……....……………………..……….……… 47
Financial Strengths and Weaknesses (SWOT) Analysis………………….……… 58
VALUE-BASED FINANCIAL ANALYSIS AND RECOMMENDATIONS...……… 62
Strategy for Increasing the Company’s Value…………....…..…..……….……… 62
REFERENCES.......................................................................................................……… 64
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LIST OF FIGURES
FIGURE 1:
Anatomy of a Trade ………………..……………………………
24
FIGURE 2:
Dow Jones Historical Trends ……………………………………
25
FIGURE 3:
Dow Jones Industrial Average 1900-Present Monthly..…………
26
FIGURE 4:
S&P 500 Index 1960-Present Weekly..………………….………
27
FIGURE 5:
Dow Jones Industrial Average 1960-Present Monthly..…………
27
FIGURE 6:
NASDAQ Composite 1978- Present Weekly………….………… 28
FIGURE 7:
Products and Services Segmentation..…………………………… 31
FIGURE 8:
Real Growth..………………………………..…………………… 32
FIGURE 9:
Revenue and Revenue Growth Rate..…………….……………… 32
FIGURE 10:
Income Statement, Hewlett-Packard..…………….……………… 36
FIGURE 11:
Statement of Operation, Hewlett-Packard……….………………
FIGURE 12:
Balance Sheet, Hewlett-Packard..…………….………..………… 37
FIGURE 13:
Asset Structure, Hewlett-Packard..…….………….……………… 38
FIGURE 14:
Liabilities & Equity Structure, Hewlett-Packard...………………
38
FIGURE 15:
Cash Flow Statement, Hewlett-Packard..……….………………
39
FIGURE 16:
Cash Flow Activity, Hewlett-Packard..…………….……………
40
FIGURE 17:
Cash Flow Analysis, Hewlett-Packard..………….……………… 40
FIGURE 18:
Common Size Income Statement, Hewlett-Packard..……………
FIGURE 19:
Common Size Balance Sheet, Hewlett-Packard..…...…………… 45
FIGURE 20:
Current Ratios..………………………...………….……………… 49
FIGURE 21:
Quick Ratios..…………………………..………….……………… 49
36
43
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FIGURE 22:
Inventory Turnover Ratios………….…………….……………… 50
FIGURE 23:
Days Sales Outstanding Ratios……..…………….……………… 51
FIGURE 24:
Fixed Asset Turnover Ratios..………….………….……………… 51
FIGURE 25:
Total Asset Turnover Ratios………...…………….……………… 52
FIGURE 26:
Debt Ratios..…………………………………….….……………… 53
FIGURE 27:
Profit Margin Ratios..…………………..………….……………… 54
FIGURE 28:
Basic Earnings Ratios..………………….…………...…………… 54
FIGURE 29:
Return on Total Ratios..…………….……………………..……… 55
FIGURE 30:
Return on Common Equity Ratios..…...….……….……………… 55
FIGURE 31:
Price/Earnings Ratios..…………………….……….……………… 56
FIGURE 32:
Price/ Cashflow Ratios..…………………………...……………… 57
FIGURE 33:
Market/Book Ratios……………………………….……………… 57
FIGURE 34:
SWOT Analysis……………………...…………….……………… 58
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Hewlett Packard
LIST OF ATTACHMENTS
ATTACHMENT 1:
Raw Financial Data
ATTACHMENT 2:
Processed Finance Data
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EXECUTIVE SUMMARY
This paper provides a comprehensive financial analysis of Hewlett-Packard, a leading
U.S. computer & peripheral manufacturing corporation. The paper begins with some general
information pertaining to Hewlett-Packard, including company background, products and
services, current management, mission and objectives, cultural business values and ethics,
competitive strategies, and their overall market position. The paper will then discuss the state of
the market, including historic performance and future outlook. Following this, the paper
provides an industry outlook, covering the industry’s nature and composition, growth,
opportunities and threats, and future outlook. Once this foundation is laid, the paper will provide
a comprehensive ratio to industry analysis of Hewlett-Packard; to include an analysis of their
financial strengths and weaknesses, and their overall level-of-performance within the industry.
Finally, the paper concludes with a value-based financial analysis of Hewlett-Packard, and
provides some recommendations for improved market performance. Upon completion of this
paper, the reader should have a very broad understanding of the overall market and the computer
& peripheral manufacturing industry, as well as an in-depth knowledge of Hewlett-Packard’s
financial standings and their current position within the market. With that, let’s begin…
INTRODUCTION
The Hewlett-Packard Company
Hewlett-Packard, commonly referred to as HP, is one of the largest Information
Technology (IT) companies in the world. Headquartered in Palo Alto, California, HP is a global
corporation that operates in over 170 countries across the world (en.wikipedia.org). HP
specializes in 1) developing and manufacturing computer, storage, and networking hardware, 2)
designing and developing software applications, and 3) providing IT related support and
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services. HP markets its products to individual users, as well as small, medium, and large
businesses (Annual Report, 2009). Their value chain distribution channels consist primarily of
consumer-electronics and office-supply retailers, and their software partners (en.wikipedia.org).
But they also sell directly to consumers through internet based e-stores.
HP is highly diversified across several IT market segments, providing a wide portfolio
that encompasses everything from digital cameras to digital entertainment, and from home
computers and peripherals to powerful supercomputer networks. On the services side, they
cover the spectrum from product support for individual customers to enterprise solutions and
support for small and medium size businesses. No other corporation offers as complete an IT
product portfolio as HP (www.hp.com). This broad diversification provides HP a distinctive
competitive advantage when it comes to providing the right product and service solutions to a
vast array of consumer requirements.
Hewlett-Packard Company Background
William Hewlett and David Packard started the Hewlett-Packard Company in a small
Palo Alto, California, garage in 1939. They stood the company up with an initial capital
investment of $538. HP was incorporated on 18 August 1947, but the HP trademark was not
filed until November 1954. The company went public on 6 November 1957 (en.wikipedia.org).
In the beginning, HP was not very focused. As they searched for their market position,
they worked on a wide variety of industrial electronic products (en.wikipedia.org). After a
couple successes, they decided to focus on design and production of high-quality electronic test
and measurement equipment. Within 10-years, they built a solid reputation for innovative,
reasonably priced test equipment. Their most distinguishing feature was providing
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instrumentation sensitivity, accuracy, and precision not met by comparable rivals
(en.wikipedia.org). In the late 1950s, HP spun off a small company named Dynac to specialize
in digital electronics equipment. The company was later renamed Dymec, which in 1959 was
folded back into HP. At this time, HP began building digital electronics equipment using
minicomputers manufactured by other companies. By 1966, HP entered the computer market
and began building their own microcomputers (en.wikipedia.org).
Initially, HP was not considered a credible computer company like IBM, who was well
known for their large main-frame computers. But that would soon change as they began to apply
their novel innovation and design skills towards developing small but powerful desktop
computer systems. In 1968, they become the first manufactures of mass-produced personal
computers (PCs). HP initially marketed these PCs as desk-top calculators because they believed
they would be ridiculed by the industry if they called them computers (en.wikipedia.org).
Regardless, these PCs were an engineering marvel at the time because their logic circuits were
entirely assembled with discrete components. A PC system, which included a CRT display,
magnetic-card storage, and printer was priced for around $5000 (en.wikipedia.org), which was a
significant amount of money at that time.
Over time, HP developed global respect for being the first-to-market producer of many
advances in electronic calculators. They introduced the first handheld scientific calculator in
1972 and the first handheld programmable calculator in 1974. From the beginning, HP’s design
philosophy was to “design for the guy at the next bench” (en.wikipedia.org), and their products
quickly gained a strong reputation for quality and user friendliness.
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In 1984, HP introduced inkjet and laser printers for use with their desktop PCs. These
printers were a great technological advancement beyond the dot matrix printers of the time. To
enable them to stay on the leading edge of the rapidly evolving printer industry, HP partnered
with Cannon (who was already partnered with Xerox) to develop a highly successful line of allin-one printer/scanner/copier/fax machines. The print mechanisms for these printers were based
almost entirely on Canon components, which in turn used technology developed by Xerox. HP
developed proprietary hardware, firmware, and software that converted data into dots for the
mechanism to print (en.wikipedia.org). This provided HP a technology advantage that could not
be easily copied by rivals. In addition to their many partnerships, HP also grew through
acquisition strategies; buying Apollo Computer in 1989 and Convex Computer 1995.
By the mid 1990s, HP began to expand their computer product line to reach common
consumers. Up until this point, their sales strategy was primarily targeted towards university,
research, and business users (en.wikipedia.org). Although HP did quite well selling PCs and
peripherals through their value chain distributors, they desired a closer relationship with their end
customers. To accomplish this, they opened hpshopping.com in the late 1990s as an independent
subsidiary that sold directly to customers online. This initiative was very successful; providing
direct customer feedback that HP used to further customize their product lines. This enabled HP
to be very receptive to their customers’ needs and resulted in strong consumer loyalty. In 2005,
the HP on-line store was renamed the “HP Home & Home Office Store.”
To sustain its edge in rapidly advancing digital technology, in 1999 HP made a drastic
change in their business strategy to focus strictly on their core competencies related to computer,
storage, and imaging devices. At that time, all their businesses not directly related to this core
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competency were spun off to form a new corporation called Agilent (en.wikipedia.org). HP was
now entirely dedicated towards computer, storage, and imaging products, software, and services.
Between 1999 and 2005, HP experienced extremely turbulent times. During this period,
the market halved HP’s value commensurate with the industry average, and the company
incurred heavy job losses (en.wikipedia.org). It was during this time that HP acquired Compaq.
Compact was also an IT industry leader (having itself bought Tandem Computers in 1997 and
Digital Equipment Corporation in 1998), but it was struggling from recent declines in sales and
revenues. This acquisition strategy resulted in HP becoming a top-3 player in the desktop,
laptop, and server industry (en.wikipedia.org). Soon following this merger with Compaq, HP’s
new symbol became HPQ; incorporating the “Q" logo Compact had used on all of its products.
In 2006, HP reinvented its business strategy with a new campaign slogan, “The Computer
is Personal Again” (en.wikipedia.org). This campaign was focused on the preface that the PC is
a personal product. The campaign utilized the newest information age marketing methods,
including viral marketing, sophisticated visuals, and its own web site. With the financial crisis
facing the US and global economies beginning in 2007, HP was increasingly pressured to again
diversify beyond their existing market areas. As a result, in 2009 HP acquired 3 Com for $2.7
billion in cash (en.wikipedia.org). This move initiated HP’s immersion into the enterprise
networking market currently dominated by Cisco. Only time will tell how well this
diversification will pay off for HP.
Hewlett-Packard Products and Services
As discussed earlier, HP’s product lines are focused on personal computing devices,
enterprise servers, storage devices, printers, and other imaging products. Specific products
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produced by HP include workstation computers, home & small business computers, servers,
printers, scanners, digital cameras, calculators, PDAs, and associated software applications
(www.hp.com). In addition to producing hardware and software, HP also provides a vast array
of services for designing, implementing, and supporting IT infrastructures.
Today, HP’s distinctive competencies that give them a competitive edge within the
industry are related to the production of innovative imaging & printing systems and solutions.
They are the world’s leading provider of inkjet and laser jet printers, printer consumables (ink
and toner cartridges), all-in-one multifunction printer/scanner/faxes, large format printers, printer
management software, output management software suites, optical recording technology, digital
cameras and photo printers, photo sharing and photo products services, and iPhone software
applications (www.hp.com).
In addition, based on unit volume shipped and annual revenue, HP is today’s world
leading producer of personal computers (www.hp.com). Such products include business PCs
and accessories, consumer PCs and accessories, handheld computing devices, digital "connected"
entertainment, media smart servers, and DVD+RW drives.
Under HP’s enterprise business, they also provide world-renowned technical services,
information management software, business intelligence solutions, communications and media
software, and enterprise/ networking storage services. To leverage their venture into enterprise
business services and to augment their software offerings for business customers, HP followed a
deliberate strategy that included the purchase of 12 independent software companies
(www.hp.com).
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Finally, HP has a large investment in IT research and development, which delivers new
technologies and creates business opportunities that go beyond their current product strategies.
This effort includes a web-based forum on early-state innovations to encourage open feedback
from consumers and the development community.
Hewlett-Packard Management and Leadership
Like most publicly owned corporations, Hewlett-Packard is managed by a Chief
Executive Officer (CEO) and several lower executive-level officers. Following are the executive
leaders and managers of HP (Annual Report, 2009):
Mark V. Hurd is the Chief Executive Officer and President. He has served as Chairman since
September 2006 and as Chief Executive Officer, President, and a member of the Board since
April 2005.
Peter J. Bocian has served as Executive Vice President and Chief Administrative Officer since
December 2008
R. Todd Bradley has served as Executive Vice President of Personal Systems since June
2005.
Michael J. Holston has served as Executive Vice President and General Counsel since February
2007 and as Secretary since March 2007.
Vyomesh I. Joshi has served as Executive Vice President of Imaging and Printing Group since
2002.
Catherine A. Lesjak has served as Executive Vice President and Chief Financial Officer since
January 2007.
Ann M. Livermore has served as Executive Vice President of Enterprise Business since May
2004.
John N. McMullen has served as Senior Vice President and Treasurer since March 2007.
Randall D. Mott has served as Executive Vice President and Chief Information Officer since July
2005.
James T. Murrin has served as Senior Vice President, Controller and Principal Accounting
Officer since March 2007.
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Marcela Perez de Alonso has served as Executive Vice President, Human Resources since
January 2004.
Shane V. Robison has served as Executive Vice President and Chief Strategy and Technology
Officer since May 2002.
Hewlett-Packard Mission, Goals, and Objectives
Hewlett-Packard's Mission Statement is very broad and comprehensive. Following is an
excerpt from their mission statement:
We are a leading global provider of products, technologies, software, solutions and services to
individual consumers, small- and medium-sized businesses, and large enterprises, including
customers in the government, health and education sector (Annual Report, 2009).
HP's mission and corporate objectives remain the same as they were when first written by
co-founders Bill Hewlett and Dave Packard in 1957 (Annual Report, 2009). As such, they have
successfully guided the company for over 50 years. Whether or not their corporate objectives are
well written can be debated, but one thing remains certain; they have successfully held up to the
test of time. Following are seven corporate objectives from HP’s mission statement (Annual
Report, 2009):
Customer loyalty. To provide products, services and solutions of the highest quality and
deliver more value to our customers that earns their respect and loyalty.
Profit. To achieve sufficient profit to finance our company growth, create value for our
shareholders and provide the resources we need to achieve our other corporate objectives.
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Market leadership. To grow by continually providing useful and significant products,
services and solutions to markets we already serve - and to expand into new areas that build on
our technologies, competencies and customer interests.
Growth. To view change in the market as an opportunity to grow; to use our profits and
our ability to develop and produce innovative products, services and solutions that satisfy
emerging customer needs.
Employee commitment. To help HP employees share in the company's success that they
make possible; to provide people with employment opportunities based on performance; to
create with them a safe, exciting and inclusive work environment that values their diversity and
recognizes individual contributions; and to help them gain a sense of satisfaction and
accomplishment from their work.
Leadership capability. To develop leaders at every level who are accountable for
achieving business results and exemplifying our values.
Global citizenship. Good citizenship is good business. We live up to our responsibility to
society by being an economic, intellectual and social asset to each country and community in
which we do business.
Hewlett-Packard Vision
HP’s vision statement is somewhat vague as far as their future market position. It seems
to be more of a broad-stroke statement of their commitment towards, and the potential corporate
benefits of, a diversified workforce. It focuses on diversity, leadership, and their global quest.
Following is HP’s vision statement:
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We believe diversity is a key driver of our success. Putting all our differences to work across the
world is a continuous journey fueled by personal leadership from everyone in our company. Our
aspiration is that the behaviors and actions that support diversity and inclusion will come from
the conviction of every HP employee - making diversity and inclusion a conscious part of how we
run our business throughout the world (www.hp.com).
Hewlett-Packard Cultural Business Values
Bill Hewlett and Dave Packard established a management style and corporate culture
they referred to as the "The HP Way." According to Hewlett, the HP Way "...includes a deep
respect for the individual, a dedication to affordable quality and reliability, a commitment to
community responsibility, and a view that the company exists to make technical contributions for
the advancement and welfare of humanity." (as cited by en.wikipedia.org, n.d.)
HP’s value statements (The HP Way) are very short and to the point, making them easily
understood and communicated. Six of HP’s value statements include (en.wikipedia.org):
Our shared values. The way we get things done
Passion for customers. We put our customers first in everything we do.
Achievement and contribution. We strive for excellence in all we do; each person's
contribution is key to our success.
Results through teamwork. We effectively collaborate, always looking for more efficient
ways to serve our customers.
Speed and agility. We are resourceful, adaptable and achieve results faster than our
competitors.
Meaningful innovation. We are the technology company that invents the useful and the
significant.
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Hewlett-Packard Cultural Business Ethics
HP has earned a long respected reputation for conducting business in a fair and honest
manner. They have established high ethical standards of conduct, and they’ve done an
outstanding job of living up to those standards in their business activities. Dave Packard’s
following statement says it best:
“At HP we want to be a company that is known for its leadership in corporate ethics and
responsibility. A company where employees are proud to work, and customers, partners and
suppliers want to do business with.” (www.hp.com, n.d.)
The ethics values Bill Hewlett and Dave Packard brought to the company over 70 years
ago are still engrained into HP’s corporate culture. Following are HP’s ethics statement and two
of the traits they have strived to sustain (www.hp.com):
Our ethical standards and shared values form the cornerstone of our culture of uncompromising
integrity. Our culture of integrity and accountability, and our performance culture go hand-inhand. We win, both as individuals and as a company, by doing the right thing.
Trust and respect for individuals - We work together to create a culture of inclusion
built on trust, respect and dignity for all.
Uncompromising integrity - We are open, honest and direct in our dealings.
Hewlett-Packard Industry Competition
The IT industry is intensely competitive, while also subject to rapid ongoing
technological advancements and price reductions. As such, HP experiences stiff industry
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competition in all their business activities. HP has met this competition head on, and is a
powerful contender because of their ability to successfully compete on several fronts; including
technology, performance, price, quality, reliability, brand reputation, distribution, range of
products and services, ease of use, and product support (Annual Report, 2009). Every IT market
segment consists of multiple major corporations with long-established market positions, as well
as rapidly growing newcomer firms. Because most IT products and technology have very short
life cycles, to successfully compete, HP must constantly innovate, develop, and introduce new
and enhanced products. Another continuing trend in the IT industry is declining consumer
prices, even as technological capabilities are enhanced. This means that, to remain competitive,
HP must continuously find ways to reduce the value chain costs of their suppliers and
distributors. But HP has distinctive competitive advantages when it comes to global reach,
research and development capabilities, and intellectual property.
Hewlett-Packard Competitive Strategies
HP has a wide ranging and well established competitive strategy that focuses on
competitive positioning within the industry, operational efficiency, growth investments, and
leveraging the scale and scope of their product lines. These strategies have proven quite
successful. Following are HP’s four strategy objectives (Annual Report, 2009):
Competitive Positioning – We are positioning our businesses to take advantage of
important trends in the markets for our products and services. We are aligning our printing
business to capitalize on key market trends such as the shift from analog to digital printing and
the growth in printable content by developing innovative products for consumers such as the first
web-connected home printer. We are also positioning our enterprise business to capitalize on
the trend towards converged infrastructure products that integrate storage, networking, servers
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and management software. In addition, we have developed IT management software offerings
that seek to satisfy the increasing demand for virtualization management and increased
automation.
Driving Operational Efficiency – We have implemented an ongoing program to optimize
efficiency and reduce cost across the company. As part of those efforts, we are continuing to
execute on our multi-year program to consolidate real estate locations worldwide to fewer core
sites in order to reduce our IT spending.
Investing for Growth – We are investing some of the savings derived from our efficiency
initiatives for growth. For example, we are increasing our sales coverage to expand the size of
the market that we cover, including expanding into emerging markets such as China, India and
Brazil. We are creating innovative new products and developing new channels to connect with
our customers, particularly in our PC business. In addition, we are expanding our portfolio of
products and services that we can offer to our customers, both through acquisitions and through
organic growth.
Leveraging our Portfolio and Scale – We now offer one of the IT industry’s broadest
portfolios of products and services, and we are working to leverage that portfolio as a strategic
advantage. For example, in our enterprise business, we are able to provide servers, storage and
networking packaged with services that can be delivered to customers in the manner of their
choosing, be it in-house, outsourced or as a service via the Internet. Our portfolio of
management software completes the package by allowing our customers to manage their IT
operations in an efficient and cost-effective manner. In addition, we are working to optimize our
supply chain by eliminating complexity, reducing fixed costs, and leveraging our scale to ensure
the availability of components at favorable prices even during shortages. We are also expanding
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our use of industry standard components in our enterprise products to further leverage our
scale.
Hewlett-Packard Growth and Market Position; Sales and Assets
Sales. HP has long retained its leading global position in the inkjet, laser, and multifunction printers market. In 2006, HP posted higher revenues than IBM, their number one rival,
making them the overall top dog in the IT industry. They have sustained this lead as the world’s
largest IT seller since that time. In 2007, HP’s revenue increased to $104 billion, making them
the first-ever IT company to report revenues in excess of $100 billion (en.wikipedia.org). In
2009, HP’s revenues exceeded IBM’s by over $21 billion. At this time, their number one rival is
Acer, and their market share gap is 6.3%. Their long-time rival, Dell, fell back to third place. In
addition to their sustained successes in the PC and printer markets, HP has also advanced to
become the world’s 6th largest software company (en.wikipedia.org).
Assets. HP is obviously a rapidly growing corporation. Much of this growth has been
obtained through successful acquisitions and mergers. For example, its merger with Compaq in
2002 and its acquisition of EDS in 2008 led to combined revenues of 118.4 B in 2008. HP
received the Fortune 500 ranking of #9 in 2009 (en.wikipedia.org). Also in 2009, HP announced
the acquisition of 3 Com. This initiative will diversify HP into the lucrative enterprise
networking market.
Hewlett-Packard Social Responsibility
HP has always displayed a strong commitment to social responsibility. Unlike many
corporations who say the right things, but fail to follow through with actions, HP has a very good
track record of making a difference for the communities in which they operate and live.
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HP announced in 2007 that they met their 4-year target to recycle 1 billion pounds of
electronics, toner, and ink cartridges. Since then, they set a new goal of recycling an additional 2
billion pounds of hardware by the end of 2010 (en.wikipedia.org). These efforts to protect the
environmental from the waste of their products go well beyond that of most their industry
competitors.
During 2009, Newsweek ranked HP #1 in their Green Rankings of America's 500 largest
corporations. This recognition resulted primarily from HP’s greenhouse gas emission reduction
programs (en.wikipedia.org). HP was an industry first to report greenhouse gas emissions
associated with their supply chain. In 2010, HP was awarded the #1 position of Corporate
Responsibility Magazines’ 100 Best Corporate Citizens.
HP’s commitment to social responsibility is even included as a focus area in their mission
statement:
Global citizenship - Good citizenship is good business. We live up to our
responsibility to society by being an economic, intellectual and social asset to each country and
community in which we do business (Annual Report, 2009).
MARKET OUTLOOK
Introduction to the Stock Market
The stock market can be described as an organized buying and selling (or trading) of
company stocks. Some of the most common stock markets include the New York Stock
Exchange (NYSE), the American Stock Exchange (AMEX), and the NASDAQ.
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The stock markets are regulated by the United States Securities and Exchange
Commission (SEC). Their mission is to protect investors, maintain fair, orderly and efficient
markets, and facilitate capital formation (www.sec.gov).
The U.S. investment markets began in 1790 when the federal government issued $80
million in bonds to repay the Revolutionary War debt. Two years later, twenty-four brokers and
merchants signed the “Buttonwood Agreement,” agreeing to trade securities on a commission
basis and laying the basis for securities trading in New York City (www.nyse.com). In 1817,
New York brokers formed the New York Stock & Exchange Board (NYS&EB). The name was
shorted to New York Stock Exchange (NYSE) in 1863. In 2006, the NYSE merged with
Archipelago to form the NYSE Group, Inc., trading publicly on March 8. In 2007, the NYSE
Group merged with Euronext, and was renamed NYSE Euronext. Euronext is a combination of
the Paris Bourse, Brussels Exchange, Amsterdam Exchange, Lisbon Exchange, London
International Financial Futures, and Options Exchange. NYSE Euronext became the first ever
global financial marketplace group.
The American Stock Exchange (AMEX) grew from what began as the New York Curb
Market (and later, in 1929, the New York Curb Exchange). The name curb was because traders
would often conduct business in the streets. They were known as “curbstone brokers.” These
independent traders often invested in smaller up and coming companies that provided new
investment opportunities. In 1929, the New York Curb Market changed their name to the
American Stock Exchange. The AMEX joined the NYSE Euronext in 2008.
The NASDAQ market (once an acronym for National Association of Securities Dealers
Automated Quotations) is made up of technology, retail, communications, financial services,
transportation, media, and biotechnology companies. It is the largest U.S. electronic stock
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market. Unlike the NYSE and the AMEX, the NASDAQ does not have a trading floor. Instead,
NASDAQ’s presence is shown using the NASDAQ Market Site in New York’s Times Square.
The tower has a large outdoor electronic display, which provides current financial information 24
hours a day. The NASDAQ historically has maintained greater stability in times of market stress
(www.nasdaq.com).
The level of successes (and failures) of the stock markets are measured by various stock
market indices. Along with the NASDAQ Composite, two of the most referred to and used are
the Dow Jones Industrial Average (DJIA) and the Standard & Poors (S&P) 500. The Dow Jones
is comprised of a price-weighted average of 30 pre-defined stocks. These stocks are from large,
publicly traded U.S. companies. Although widely recognized as an indicator of market
performance, the Dow has often been criticized as not an accurate representation of the overall
performance because it uses a very small number of stocks.
The S&P 500, on the other hand, is a market-value weighted average of 500 stocks from
large US companies which are traded on the NYSE or the NASDAQ. Because the S&P factors
many more companies, it is often referred to as the preferred index, providing a truer indication
of the stock markets.
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Figure 1: Anatomy of a Trade
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Market periods are frequently referred to bull or bear. The bull-bear line is a reference to
the 250-day moving average line, which provides a reference point for mid and long term
investors. If the index is below the line and there is a decrease in movement, the market is
considered a bear market. If the index is above the line and the movement is generally upward, it
is considered to be a bull market. However, again, the level of the market and the period the
market is in is purely one’s own perception.
Historical Performance
As detailed in the below figure, history shows that the market typically moves in cycles.
In the past 113 years, there have been four bull markets (shown in green) and four bear markets
(shown in red). Investment strategies that work in bull markets may not be effective in flat or
bear markets (www.fulfillment.cfgweb.com).
Figure 2: Dow Jones Historical Trends
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The following charts show the progress of the Dow Jones Industrial Average, S&P 500
Index, and the NASDAQ Composite over the years. As you can see, the trend has been a
continuous upward slope with the exception of a few periods, such as the recent recession we
faced in the early 2000’s (the September 11, 2001 terrorist attacks and aftermath, the recent bank
failures, and the drop in housing prices) (stockcharts.com). If you overlay the Dow Jones
Industrial Average and the S&P 500 Index historical data, you will see that the charts almost lay
on top of one another thereby showing the relative similarities in the markets (online.wsj.com).
Figure 3: Dow Jones Industrial Average 1900-Present Monthly
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Figure 4: S&P 500 Index 1960-Present Weekly
Figure 5: Dow Jones Industrial Average 1960-Present Monthly
- 26 -
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Figure 6: NASDAQ Composite 1978- Present Weekly
Future Outlook
The future outlook of the market is always a cloudy crystal ball. If one could easily
predict the future of the market, there would be little risk in investing. It is always easier to look
in the past and jump on the bandwagon pretending to have been able to foresee the future as
many economical analysts have done.
There is still a great deal of people who buy securities in the market based on current and
past performance. In the New York Times Article, “Buy American. I Am.”, dated 16 October
2008, Warren E. Buffett (CEO of Berkshire Hathaway) stated, “A simple rule dictates my
buying: Be fearful when others are greedy, and be greedy when others are fearful”
(www.nytimes.com, n.d.). Investors should not be too wary of the down turns of the market in
the past as much as they should realize that they are simply getting a bargain on securities at this
time (they are on sale!).
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Buffett also wrote, in the same article, that “Cash is trash”. "Today people who hold cash
equivalents feel comfortable," he writes. "They shouldn't. They have opted for a terrible longterm asset, one that pays virtually nothing and is certain to depreciate in value." This is where
the Time Value of Money principles apply. Money is never worth the same tomorrow as it is
today. Money cannot gain anything simply sitting in an envelope on a shelf or in a safe.
Buffett goes on to say that equities will almost certainly outperform cash over the next
decade, probably by a substantial degree. Some investors think it’s wise to hold on to their cash
until they can effectively time their move back into the market at a later date. This strategy,
Buffett points out, ignores Wayne Gretzky’s advice, who once said, “I skate to where the puck is
going to be, not to where it has been.”
Consumers were able to use their homes to get extra spending cash; using them as a sort
of ATM machine by getting home equity loans or second mortgages. However, with the
collapse of the housing market, and home prices falling, many of these individuals have not only
lost equity, but now have one or two additional home loans.
Because the market is affected by multiple factors, both at home and abroad, it is often
unclear how and when any minor or major event may trigger a large ripple effect. Often, even a
simple rumor may change the direction of the markets.
That said, the future of the market should not matter too much for the long term investor.
Based on historical trends, every dip in the market is followed by a growth. One just needs to be
wary of the growth, for it too will soon fall again.
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Although the market has been slowly gaining ground, the Federal Reserve does not
anticipate raising interest rates any time soon. They anticipate leaving the rates as they are for
“an extended period” (online.wsj.com). Hopefully, the Fed’s actions to leave rates at these
historically low levers will encourage spending.
One final trend that should be noted is that NASDAQ has maintained greater stability in
times of market stress. When markets are unstable, specialist firms reduce their risk by widening
spreads, participating less, or halting the stock altogether. NASDAQ's spreads remain tight and,
as a result, volume shifts to NASDAQ and other electronic markets (www.nasdaq.com).
INDUSTRY OUTLOOK
Nature of the Industry
The North American Industry Classification System (NAICS) classifies HP in the
‘Computer & Peripheral Manufacturing in the US’ industry, with a code of 33411. This is
comparable to the Standard Industrial Classifications (SIC) ‘Computer Peripheral Equipment
(3577) and the Standard & Poor’s ‘Computer Hardware’ sub-industry. The companies in this
industry manufacture and assemble personal computers, workstations, laptops, computer servers,
and computer storage devices, with some variations among the companies.
Per the IBIS World Industry Report, technology innovations characterize this industry.
Selling prices, economic activity (disposable household income), product advancements, specific
national/global events (e.g. Y2K), and substitute products drive the industry demand.
Additionally, many companies in this industry manufacture their products outside the U.S.;
either directly or by others (2010). Thus, changes in the applicable nations’ wage structures and
economy can have a significant impact to companies in this industry.
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Type of Composition
Forty-three percent of the industry’s 2010 revenues are expected to come from the top
several companies; with HP, IBM, and Dell being the top-three industry leaders. “Industry
concentration has (resulted from) increased industry mergers (e.g. Seagate acquiring Maxtor) and
market share gains by major players. However, products and markets (within the industry) have
broadened” (IBIS 2010). This broadening is with such products as netbooks.
Figure 7: Products and Services Segmentation (IBIS)
Product/Services
Share
Electronic computers
63.1%
Other computer peripherals
24.1%
Computer storage devices
12.5%
Computer terminals
0.3%
Though HP, IBM, and Dell are the top-three industry peers, their market comparisons
couldn’t be more diverse. HP is in the middle of the stock value range, with a price of $53.42 (at
the time of this report, Dell was priced at $17.00 and IBM was priced at $129.26). In addition,
IBM appears to be the low-risk and high revenue leader of this peer group, with a 0.81 beta and
14% of the industry’s revenue. Dell is a riskier company with a 1.3 beta and an industry revenue
percentage of 2.7%. HP holds a comfortable middle position behind IBM, but well ahead of
Dell, with an industry revenue percentage of 6.7% - half of IBM’s, but double Dell’s
Average Industry Growth
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In 2009, per the S&P Sub-Industry Summary, the Industry Index rose 74.2%, strongly
surpassing the 24.3% gain in the S&P 1500 index. Year to date through 4/28/10, the Industry
Index rose 6.7% verses 7.7% increase in S&P 1500 (Smith 2010). However, in terms of real
growth for industry revenue, industry gross product, etc., the industry has been in a five year
decline across the board. See Figure 8.
Figure 8: Real Growth (IBIS)
Industry Revenue
Industry Gross Product
Number of Establishments
Number of Enterprises
Employment
Exports
Imports
Total Wages
Domestic Demand
2006
*0.3
*-0.5
*-3.5
*-3.5
*-8.3
*1.3
*4.0
*-12.6
*2.8
2007
*-8.1
*-9.7
*-5.0
*-5.0
*-7.0
*-6.9
*0.7
*-7.0
*-1.5
Figure 9: Revenue and Revenue Growth Rate (IBIS)
2008
*-6.6
*-7.9
*-5.0
*-5.0
*-7.0
*-2.9
*-3.3
*-7.0
*-5.5
2009
*-9.2
*-12.0
*-5.0
*-5.0
*-9.0
*-8.0
*-9.5
*-9.0
*-10.0
2010
*-1.7
*-2.3
*-3.0
*-3.0
*-3.0
*1.0
*0.0
*-1.8
*-1.5
%
%
%
%
%
%
%
%
%
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Opportunities and Threats in the Industry
Threats
Competitive Market. Across the industry, strong price competition and rising component
costs are putting heavy pressure on the profit margins. This is driven by the fact that there are
several long established major industry players, including Dell, IBM, Sun Microsystems, HP,
Apple, and others (Global Markets 2009). These low profit margins make investments in
technological advances a fine, but necessary balance for the industry leaders.
Declining Global PC Shipments. As margins in the computer manufacturing industry
shrink, research from Gartner, a research firm, forecasts that global PC shipments will decline by
about 11.9% to 257 million units; the sharpest decline in history. Gartner also states that the
sales in emerging markets will decline. This global reduction in PC sales could further increase
pricing pressures and result in further industry operating margin losses (Global Markets 2009).
Global Economic Slowdown. The ongoing economic crisis has had major effects on all
geographic regions, prominently across Europe and the US. Real U.S. GDP decreased by 2.4
percent in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an
increase of 0.4 percent in 2008 (Gross Domestic Product 2009). Such weak economic conditions
across the industry’s key markets could further pressurize the companies’ revenues and thereby
adversely affect the overall business (Global Markets 2009).
Opportunities
Demand for IT Outsourcing. “There is increased spending on IT outsourcing across the
world” and “This trend is expected to continue” (Global Markets 2009). The industry has been
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taking advantage of this opportunity by offsetting low margins from hardware production with
high margins from services. As an example, in August 2008, HP paid $13B for a technology
services provider, Electronic Data Systems. In doing so, HP is positioning the company to take
advantage of the higher profit margins obtained for services. This makes good sense, since HP is
the worldwide leader in PC sales, but as mentioned in threats, this provides low-profit margins.
HP’s Personal Systems Group only accounted for 12% of earnings with 31% of revenue (high
costs), versus services providing 38% of earnings with only 30% of revenues (Stock Report
2010). This picture is the same across the industry; IBM has gone so far as to sell their PC
segment to Levono.
Wireless and Portable Computing. The Computer Hardware Sub-Industry has potential
opportunities in wireless and portable computing, as it appears there is a growing consumer
preference for this, per the S&P Stock Report (2010). In addition, the demand for small, lowcost “ultra-portable” notebook PCs and internet-based applications are experiencing strong
growth. As such, these are some of the continuing technological advancement opportunities that
industry players should take advantage of.
Future Outlook
The demand for computers and peripherals is expected to grow; however, prices are
expected to fall at a faster rate. As previously stated, competitive downward pressure on average
unit selling prices will negatively impact revenue (IBIS 2010). Overall, “the industry is expected
to contract further in the five years through 2015, at a real average rate of 0.3% annually”. These
low hardware margins are going to further fuel price competition, making infrastructure and
other value chain costs saving of utmost importance. But all is not lost, as the S&P is projecting
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the cyclical downturn in PC sales to rebound with a projected growth of 17% in 2010 and 15% in
2011; which is much better than the 3% growth experienced in 2009. However, these increased
sales will be offset by the continuing trend toward lower average selling prices.
One final factor that should not be overlooked in relation to the computer hardware
industry is the fact that demand in this market can be substantially impacted by unpredictable
events, such as the 9/11 Terrorist attack or the “Y2K bug.” Of course, such events can have
positive or negative effects on the industry depending on the nature of the event. Similarly, new
advancements in technology are sometimes unexpected and can result in exponential growth – as
in the case of IPods and e-Readers.
FINANCIAL STATEMENT ANALYSIS
General Discussion of HP Financial Statements
The Financial statement provides information of value to investors, lenders, and
corporate officials. Financial statements include an income statement, a balance sheet, and a
cash flow statement for specific periods of time. This report focuses on annual data. Financial
statements are typically prepared using Generally Accepted Accounting Principles (GAAP),
which are common guidelines used to normalize accounting practices. The following figures
provide an income statement, a balance sheet, and a cash flow statement for HP over the past
five years (2009 – 2005). In addition, some graphic representations of the data located on these
sheets are added to better clarify the given information. And an analysis of this information will
follow.
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Figure 10: Income Statement, Hewlett-Packard, (In Millions of Dollars)
Income Statement (Millions of Dollars)
2009
2008
2007
2006
2005
Revenue
Net Sales (Revenue)
114552
114552
118364
118364
104286
104286
91658
91658
86696
86696
Cost of Revenue
Other Expenses
Depreciation/Amortization
Total Operating Expense
87524
15321
1571
104416
89921
17003
967
107891
78887
15897
783
95567
69427
15067
604
85098
66440
16267
622
83329
Operating Income (EBIT)
10136
10473
8719
6560
3367
Interest Income (Expense) , Net NonOperating
Net Income Before Taxes (EBT)
-721
9415
0
10473
458
9177
631
7191
176
3543
Income Taxes
Income After Taxes
1755
7660
2144
8329
1913
7264
993
6198
1145
2398
Figure 11: Statement of Operation, Hewlett-Packard, (In Billions of Dollars)
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Figure 12: Balance Sheet, Hewlett-Packard, (In Millions of Dollars)
Balance Sheet (Millions of Dollars)
2009
2008
2007
2006
2005
Cash and Short Term Investments
Total Receivables, Net
Total Inventory
Other Current Assets
Total Current Assets
13334
25301
6128
7776
52539
10246
25439
7879
8164
51728
11445
21582
8033
6342
47402
16422
18555
7750
5537
48264
13929
17364
6877
5164
43334
Property/Plant/Equipment, Total - Gross
Accumulated Depreciation, Total
Property/Plant/Equipment, Total - Net
Goodwill, Net
Note Receivable - Long Term
Intangibles, Net
Other Long Term Assets, Total
Total Other Assets
20944
-9682
11262
33109
3303
6600
7986
62260
18885
-8047
10838
32335
2722
7962
7746
61603
16411
-8613
7798
21773
2778
4079
4869
41297
15024
-8161
6863
16853
2340
3352
4309
33717
13880
-7429
6451
16441
2246
3589
5256
33983
114799
113331
88699
81981
77317
Accounts Payable
Accrued Expenses
Notes Payable/Short Term Debt
Current Port. of LT Debt/Capital Leases
Other Current Liabilities, Total
Total Current Liabilities
14809
16528
707
1143
9816
43003
14138
18511
7502
2674
10114
52939
11787
14441
2511
675
9846
39260
12102
12435
624
2081
8608
35850
10223
11188
649
1182
8218
31460
Long Term Debt
Deferred Income Tax
Other Liabilities, Total
Total Liabilities
13980
4230
13069
74282
7676
3162
10612
74389
4997
397
5519
50173
2490
3392
5497
43837
5289
40141
Common Stock, Total
Additional Paid-In Capital
Retained Earnings (Accumulated Deficit)
Other Equity, Total
Total Equity
24
13804
29936
-3247
40517
24
14012
24971
-65
38942
26
16381
21560
559
38526
27
17966
20729
-578
38144
28
20490
16679
-21
37176
114799
113331
88699
81981
77317
Total Assets
Total Liabilities and Equity
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Figure 13: Asset Structure, Hewlett-Packard, (In Billions of Dollars)
Figure 14: Liabilities & Equity Structure, Hewlett-Packard, (In Billions of Dollars)
- 37 -
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Figure 15: Cash Flow Statement, Hewlett-Packard, (In Millions of Dollars)
Cash Flow (Millions of Dollars)
2009
2008
2007
2006
Net Income/Starting Line
Depreciation
Deferred Taxes
Non-Cash Items
Changes in Working Capital
Cash from Operating Activities
7660
4773
379
1632
-1065
13379
8329
3356
1035
1086
785
14591
7264
2705
415
517
-1286
9615
6198
2353
693
759
1350
11353
2398
2344
-162
1898
1550
8028
Purchase of Fixed Assets
Acquisition of Business
Sale of Fixed Assets
Sale/Maturity of Investment
Purchase of Investments
Cash from Investing Activities
-3695
-391
495
171
-160
-3580
-2990
-11248
425
280
-178
-13711
-3040
-6793
568
425
-283
-9123
-2536
-855
556
94
-46
-2787
-1995
-641
542
2066
-1729
-1757
Other Financing Cash Flow
Total Cash Dividends Paid
Issuance (Retirement) of Stock, Net
Issuance (Retirement) of Debt, Net
Cash from Financing Activities
162
-766
-3303
-2766
-6673
293
-796
-7810
6293
-2020
481
-846
-7784
2550
-5599
251
-894
-5241
-193
-6077
0
-926
-2353
-1744
-5023
Net Cash – Beginning Balance
Net Cash - Ending Balance
10153
13279
11293
10153
16400
11293
13911
16400
12663
13911
3126
-1140
-5107
2489
1248
Net Change in Cash
2005
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Figure 16: Cash Flow Activity, Hewlett-Packard, (In Billions of Dollars)
Figure 17: Cash Flow Analysis, Hewlett-Packard, (In Billions of Dollars)
- 39 -
Hewlett Packard
- 40 -
The income statement, Figure 10, itemizes revenues and expenses for HP over the last
five years. This statement is used by investors and lenders to determining the profit ability of the
company. The income statement also shows earnings per share (EPS), normalizing the
measurement of a firm’s performance and allowing investors to compare diverse companies such
as HP to other similar industry competitors. Figure 11, Statement of Operation, gives a visual
representation of Revenue, Expenditures, Earnings Before Interest and Taxes (EBIT), and Net
Income over the past 5 years. The difference between revenue and expenditures is equal to the
EBIT. The net income is what remains after taxes and interest have been accounted for. In
2009, HP took in 114.6 billion dollars in revenue and claimed only 7.7 billion dollars in net
income, a 6.71% profit margin.
The balance sheet, Figure 12, provides assets, liabilities, and owners' equity (net worth)
for HP over the last five years. The balance sheet is used by investors and lenders to evaluate the
company’s ability to adjust to changing markets and future opportunities. Figure 13, Asset
Structure, gives a visual representation of current and fixed assets over the past five years.
Figure 14, Liability & Equity Structure, gives a visual representation of current and long term
liability, as well as equity, over the past five years. Total assets for 2009 are obtained by
summing the current and fixed assets at a total sum of 114.8 billion dollars. Total liabilities and
equity for 2009 are obtained by summing the total liabilities with the total equity at a total sum of
114.8 billion dollars. Both the total assets and total liabilities plus equity should equal the same
amount.
The cash flow statement, Figure 15, presents cash generated from operating, investing, or
financing activities for HP over the last five years. The cash-flow statement is used by investors
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and lenders to determine whether cash will be available to meet debts and payments such as
dividends. Figure 16, Cash Flow Activity, gives a visual representation of the year end (next
year beginning) net cash and the net change in cash from year to year. HP had a total of 3.1
billion dollars cash at the end of 2009. Figure 17, Cash Flow Analysis, gives a visual
representation of the cash from operating, investing, and financing activities for HP over the last
five years. The summation of these three activities provides the net change in cash flow equal to
that of the net change in cash flow from year to year.
Given the complexities of the Income Statements, Balance Sheets, and Cash Flow
Statements, the data provided, while balanced, shows limited detail with only critical values;
many of which were used in the calculation of the required ratios.
Financial Ratios
For the purpose of clarity and understanding, the discussion of financial ratios, to include
HP specific financial ratios, has been incorporated into the Strengths and Weaknesses Analysis
section of this paper, under Financial Ratio to Industry Analysis.
Common Size Statements
Common size ratios will be used to compare HP’s income statements and balance sheets
over a five-year period. By expressing the financial statement items in a common size measure,
standardized values will be provided to better assess any observed trends over time. The income
statement values will be expressed as a percentage of total revenue, whereas the balance sheet
values will be expressed as a percentage of total assets.
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Common Size Income Statement Analysis. As shown in Figure 18, HP’s common size
income statement values have remained very constant over the past 3-years, between 2007 and
2009. This is in stark contrast to the year 2005, and to some extent 2006.
Between 2005 and 2007, HP’s Total Operating Expense was reduced by around 4.5%.
This appears to have resulted primarily from Other Expenses, which has continuously dropped
over the past 5-years. In concert with these reductions in operating expenses, HP also
experienced significant increases in Operating Income, Net Income Before Taxes, and Income
After Taxes, between 2005 and 2007 (4.5%, 4.7%, and 4.2% respectively). As such, although
the income statement ratios have remained consistent during the past 3-years, there have been
significant gains over the past 5-years.
Figure 18: Common Size Income Statement, Hewlett-Packard, (In Millions of Dollars)
Income Statement (Millions of Dollars)
2009
2008
2007
2006
2005
Revenue
Net Sales (Revenue)
100
100
100
100
100
100
100
100
100
100
Cost of Revenue
Other Expenses
Depreciation/Amortization
Total Operating Expense
76.4
13.4
1.4
91.2
76.0
14.4
0.8
91.2
75.6
15.2
0.8
91.6
75.7
16.4
0.7
92.8
76.6
18.8
0.7
96.1
Operating Income (EBIT)
8.8
8.8
8.4
7.2
3.9
-0.6
8.2
0.0
8.8
0.4
8.8
0.7
7.8
.2
4.1
1.5
6.7
1.8
7.0
1.8
7.0
1.1
6.8
1.3
2.8
Interest Income (Expense) , Net NonOperating
Net Income Before Taxes (EBT)
Income Taxes
Income After Taxes
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Common Size Balance Sheet Analysis. As shown in Figure 19, HP’s common size
balance sheet values indicate negative trends between 2005 and 2008, with positive changes
occurring between 2008 and 2009. Some noteworthy trends are as follows:
Total Current Assets increased 2.9% between 2005 and 2006, but then decreased 13.3%
between 2006 and 2008. These reductions primarily stemmed from reductions in Cash and Short
Term Investments; and to some extent, reductions in Total Inventory. Between 2008 and 2009,
overall Total Current Asset ratios remained virtually unchanged.
Total Other Assets dropped 2.9% between 2005 and 2006, but then increased, by 13.3%,
between 2006 and 2008. These gains primarily resulted from increases in goodwill, intangibles,
and accumulated depreciation, and were likely related to acquisitions and mergers during the
period. Between 2008 and 2009, overall Total Other Asset ratios remained virtually unchanged.
Total Current Liabilities experienced constant upward trends between 2005 and 2008
(6% total), then dropped by 9.2% between 2008 and 2009. These changes in current liabilities
were primarily due to changes in Notes Payable/Short Term Debt; and to some extent, Accrued
Expenses.
Total Liabilities increased 13.7% between 2005 and 2008, then decreased slightly (0.9%)
between 2008 and 2009. The increases observed between 2005 and 2008 appear to have resulted
from increases in Long Term Debt and Deferred Income Tax, as well as Other Liabilities.
Total Equity was inversely proportional to the changes in Total Liabilities between 2005
and 2009; with a 13.7% decrease between 2006 and 2008, and a 0.9% increase between 2008
and 2009. The vast majority of these changes were absorbed by Additional Paid-In Capital.
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Figure 19: Common Size Balance Sheet, Hewlett-Packard, (In Millions of Dollars)
Balance Sheet (Millions of Dollars)
2009
2008
2007
2006
2005
Cash and Short Term Investments
Total Receivables, Net
Total Inventory
Other Current Assets
Total Current Assets
11.6
22.0
5.3
6.8
45.8
9.0
22.4
7.0
7.2
45.6
12.9
24.3
9.1
7.2
53.4
20.0
22.6
9.5
6.8
58.9
18.0
22.5
8.9
6.7
56.0
Property/Plant/Equipment, Total - Gross
Accumulated Depreciation, Total
Property/Plant/Equipment, Total - Net
Goodwill, Net
Note Receivable - Long Term
Intangibles, Net
Other Long Term Assets, Total
Total Other Assets
18.2
-8.4
9.8
28.8
2.9
5.8
7.0
54.2
16.7
-7.1
9.6
28.5
2.4
7.0
6.8
54.4
18.5
-9.7
8.8
24.5
3.1
4.6
5.5
46.6
18.3
-10.0
8.4
20.6
2.9
4.1
5.3
41.1
18.0
-9.6
8.3
21.3
2.9
4.6
6.8
44.0
Total Assets
100
100
100
100
100
Accounts Payable
Accrued Expenses
Notes Payable/Short Term Debt
Current Port. of LT Debt/Capital Leases
Other Current Liabilities, Total
Total Current Liabilities
12.9
14.4
0.6
1.0
8.6
37.5
12.5
16.3
6.6
2.4
8.9
46.7
13.3
16.3
2.8
0.8
11.1
44.3
14.8
15.2
0.8
2.5
10.5
43.7
13.2
14.5
0.8
1.5
10.6
40.7
Long Term Debt
Deferred Income Tax
Other Liabilities, Total
Total Liabilities
12.2
3.7
11.4
64.7
6.8
2.8
9.4
65.6
5.6
0.4
6.2
56.6
3.0
4.4
6.7
53.5
6.8
51.9
Common Stock, Total
Additional Paid-In Capital
Retained Earnings (Accumulated Deficit)
Other Equity, Total
Total Equity
0.0
12.1
26.1
-2.8
35.3
0.0
12.4
22.0
-0.0
34.4
0.0
18.5
24.3
0.6
43.3
0.0
21.9
25.3
-0.7
46.5
0.0
26.5
21.6
-0.0
48.1
Total Liabilities and Equity
100
100
100
100
100
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Overall, the common size balance sheet indicates negative trends between 2005 and
2008, with positive changes occurring between 2008 and 2009.
Cash Flow Analysis
Some analysts consider cash flow as perhaps a company’s most important financial
barometer. Figure 15 shows the Cash Flow Statement for HP over the last five years, 2009 2005. The Net Income increased steadily from 2005 through 2008, followed by a 0.67 billion
dollar decrease from 2008 to 2009.
Cash from operating activities has gone from an 8 billion, five year low, in 2005 to 13.4
billion in 2009, with 2008 seeing a high of 14.6 billion. The greatest increase in cash from
operating activities was seen from 2007 to 2008. In 2007, smaller deferred taxes and non-cash
items, along with a reduction in working capital, resulted in much lower cash from operating
activities than 2006. This produced a 1.7 billion dollar reduction. Cash from operating activities
more than compensated the following year, with a 5 billion dollar increase.
Investing activities increased steadily from $1.8 billion in 2005 to $13.7 billion in 2008.
Acquisition of other businesses was the main contributor to these increased investment cash
flows. A 3-year low in investment activity was seen in 2009, with $3.6 billion being invested.
This increased overall cash flows by 10.1 billion dollars.
Cash from financing activities was both positive and negative over the past five years.
Retirement of stock was the biggest influence. 2008 saw the biggest issuance of debt at 6.3
billion dollars.
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Over the past five years, HP has seen positive and negative cash flow. As seen in figure
16, the largest adjustment occurred from 2006 to 2007 with a reduction of 7.6 billion dollars. A
1.2 billion dollar increase was seen from 2005 to 2006 and a 4.0 billion dollar increase was seen
from 2007 to 2008, yet the overall annual cash flow was negative for that year. The largest
increase in cash flow was seen from 2008 to 2009 with an increase of 4.3 billion dollars. Figure
17 shows the net cash flow analysis in billions of dollars. It can be seen that the combination of
outgoing investment and finance dollars were similar to the operating incoming dollars, the net
cash flow being the delta between the adjacent columns.
In 2007, the largest discrepancy between inflow and outflow of dollars was realized.
Investments took a large increase from 2.8 to 9.1 billion dollars with a 1.8 billion dollar decrease
in operating income. This was a contributing factor to the overall net cash flow reduction of 5.1
billion dollars seen that year.
HP plans to continue investing heavily in business growth opportunities, while increasing
operating income and managing debt.
STRENGTHS AND WEAKNESSES ANALYSIS
Financial Ratio to Industry Analysis
There are many resources available to provide financial ratios for both specific
companies and specific industries. These sources use differing ratios, as there are many to
choose from, and occasional calculation variations for computing these ratios. In addition, the
ratio calculations used are not well defined by the source, so comparison of ratios from different
sources becomes difficult. Similar issues arise when comparing data on specific industries from
differing sources. Because HP is such a large and diversified company, it can be included in
Hewlett Packard
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many industries and sub-industries within the computer & peripheral manufacturing industry.
This further compounds the issues associated with collecting data from multiple sources in an
effort to get a complete data set, and can lead to suspect or incomparable ratios.
In an effort to avoid such discrepancies, this report uses raw data from a single source
(www.galenet.galegroup.com, Eden-Webster Library) for a select number of corporations that
make up a significant majority of the computer & peripheral manufacturing industry. HewlettPackard (HPQ), International Business Machines Corp. (IBM), Dell Inc. (DELL), Apple Inc.
(AAPL), and Sun Microsystems (SUNW) provide the data sets for the industry and corporate
analysis. The raw data used in these analyses include five years of Income Statements, Balance
Sheets, and Cash Flow Statements (from 2009 to 2005), and are included as Attachment A.
The ratios presented are from a list of ratios outlined in the text, Financial Management
Theory and Practice, 12th Edition. After much research of multiple sources, Dunn & Bradstreet
(D&B) Key Financial ratios for the computer & peripheral manufacturing industry were selected
as a comparison to validate the computed ratios generated from raw data. The majority of the
computed ratios were well within the range of the D&B provided ratios.
Financial Strength. A company’s financial strength is an assessment of their business
risk. Part of this risk analysis assesses a company’s ability to cover or pay off short term debt.
This can be done by using assets that can be quickly converted to cash. These assets are
considered liquid or current assets. The following ratios are used to asses a companies liquidity
and financial strength.
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Current Ratio – [Current Assets / Current Liabilities]
A current ratio is a liquidity ratio that measures a company's ability to pay short-term
obligations. A higher ratio is considered better because it means there are more liquid assets that
could be converted to cover outstanding debt.
Figure 20: Current Ratios
Year
HP
Industry
2009
1.22
1.56
2008
0.98
1.47
2007
1.21
1.51
2006
1.35
1.43
2005
1.38
1.65
Quick Ratio – [(Current Assets – Inventories) / Current Liabilities]
A quick ratio measures a company's ability to meet its short-term obligations with its
most liquid assets. A higher ratio is considered better because it shows a company is not
dependant on inventory to cover short term debt.
Figure 21: Quick Ratios
Year
HP
Industry
2009
1.08
1.48
2008
0.83
1.38
2007
1.00
1.42
2006
1.13
1.34
2005
1.16
1.56
Upon analysis of the financial strength ratios of HP and the industry, both the current and
quick ratios for HP’s have been lower than the industry average which may question its ability to
pay short-term obligations. HP continues to maintain a high level of outstanding receivables that
cause a reduction in their quick ratio. In addition, in 2008, HP acquired Electronic Data Systems
(EDS), another information technology services provider, in a deal worth about $13 billion. This
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acquisition was paid for with cash and new debt, which provides a substantial, but manageable,
leveraging of the company's financial position. The only year that HP was not able to maintain a
liquidity ratio grater than 1:1 was 2008. The 2009 ratio increased almost 25% from 2008 and
was more in line with the company’s 5-year average of 1.23. Even in 2008, when the current
ratio was below 1, HP was able to meet all short term debt obligations.
Asset Management. A company’s asset management ratios measure success in
managing assets to generate sales. These ratios can provide insight into a company’s inventory
and credit management. The following ratios are used to asses various aspects of asset
management.
Inventory Turnover – [Sales / Inventory]
A higher Inventory Turnover Ratio is indicative of better performance since this indicates
the firm's inventories are being sold more quickly. However, if the ratio is too high then the firm
may be losing sales to competitors due to inventory shortages, reflecting a company’s ability to
convert inventory into cash.
Figure 22: Inventory Turnover Ratios
Year
HP
Industry
2009
18.7
44.4
2008
15.0
41.6
2007
13.0
39.5
2006
11.8
45.4
2005
12.6
50.4
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Days Sales Outstanding (DSO) – [Receivables / (Annual Sales/365)]
The DSO ratio provides an indication of how long it takes to collect accounts receivables,
comparing outstanding receivables to average daily sales. A lower ratio shows less time spent
waiting on outstanding receivables and quicker cash flow turnaround. This has great bearing on
a company’s credit policies.
Figure 23: Days Sales Outstanding Ratios
Year
HP
Industry
2009
80.6
73.1
2008
78.4
71.1
2007
75.5
75.8
2006
73.9
71.8
2005
73.1
65.6
Fixed Asset Turnover – [Sales / Net Fixed Assets]
The fixed asset turnover ratio compares fixed assets to sales generated. A higher fixedasset turnover ratio shows that the company is more effective in using their fixed assets to
generate revenues.
Figure 24: Fixed Asset Turnover Ratios
Year
HP
Industry
2009
10.2
12.6
2008
10.9
13.4
2007
13.4
13.0
2006
13.4
13.2
2005
13.4
14.1
Total Asset Turnover – [Sales / Total Assets]
The asset turnover ratio measures a company’s efficiency at using their assets to generate
sales or revenue. A higher number is desirable. This may also assist in indicating a pricing
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strategy. Companies with low profit margins tend to have high asset turnover,
whereas companies with high profit margins have low asset turnover.
Figure 25: Total Asset Turnover Ratios
Year
HP
Industry
2009
1.00
1.07
2008
1.04
1.22
2007
1.18
1.21
2006
1.12
1.25
2005
1.12
1.28
Upon analysis of the asset management ratios of HP and the industry, all HP ratios have
been below the industry average, with the exception of fixed asset turnover ratio in 2006 and
2007. The 5-year data shows that HP typically takes between two and three months to collect
outstanding receivables. The HP business model continues to be asset intensive. The net assets
portfolio in 2009 increased 20.8% from those in 2008. This increase resulted from higher levels
of financing originations and is reflected in the asset management ratios.
Debt Management. A company’s debt management is based on how it uses lender’s
money as an opportunity to operate and grow as a corporation. In order to stay solvent or make
greater profits, it’s sometimes more practical to invest borrowed funds rather than tie up other
critical resources. Debt ratio is the proportion of a firm's total assets that are being financed with
borrowed funds. A low debt ratio indicates conservative financing with an opportunity to
borrow in the future at no significant risk.
Debt Ratio – [Total Liabilities / Total Assets]
Debt ratio indicates what proportion of debt a company has relative to its assets. The
measure indicated potential risks the company faces in terms of its debt. A debt ratio greater
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than 1 indicates that a company has more debt than assets. A debt ratio of less than 1 indicates
that a company has more assets than debt. Used in conjunction with the current and quick ratios,
the debt ratio can help determine a company's level of risk.
Figure 26: Debt Ratios
Year
HP
Industry
2009
0.65
0.66
2008
0.66
0.69
2007
0.57
0.63
2006
0.53
0.62
2005
0.52
0.58
HP has been near, but slightly lower than the industry average for the last five years. As
seen in 2008 and 2009, HP’s long term debt increased significantly with the purchase of
Electronic Data Systems in 2008 and 3Com Corp in 2009. Total liabilities increased from 50 to
74 billion dollars from 2007 to 2009. Along with these purchases, the assets also increased from
89 to 114 billion dollars from 2007 to 2009. This increase in assets offset the increase in debt,
keeping the debt ratio slightly below the industry average. HP continues to smartly manage debt
and maintain a productive balance between debt and assets.
Profitability. A company’s profitability is a measure used to assess their ability to
generate earnings, as compared to their expenses and relevant costs. Having a higher ratio value
relative to the industry average, or the same ratio from a previous period, indicates that the
company is stable and less risky.
Profit Margin on Sale (Net) – [Net Income / Sales]
A higher profit margin on sale indicates a more profitable company that has better control
over its costs compared to its competitors. But in some cases, lower profit margins represent a
Hewlett Packard
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pricing strategy. Some businesses, especially retailers, may be known for their low-cost, highvolume approach. On occasion, a low net profit margin may represent a price war which is
lowering profits, as was seen in the computer industry during 2000.
Figure 27: Profit Margin Ratios
Year
HP
Industry
2009
6.7%
4.6%
2008
7.0%
8.2%
2007
7.0%
8.1%
2006
6.8%
5.1%
2005
2.8%
5.3%
Basic Earning Power – [Earnings Before Interest and Taxes (EBIT) / Total
Assets]
The basic earning power ratio indicates how effective assets are used to generate
earnings. A higher ratio with respect to the industry average indicates the company is controlling
their operating costs and assets, while increasing profits.
Figure 28: Basic Earnings Ratios
Year
HP
Industry
2009
8.8%
7.2%
2008
9.2%
10.9%
2007
9.8%
10.6%
2006
8.0%
8.1%
2005
4.4%
8.8%
Return on Total Assets (ROA) – [Net Income / Total Assets]
The return on total assets ratio demonstrates how effectively the company is converting
its assets into net income. The higher the ratio, the more profitable the company is, because the
company is earning more money on less investment.
Hewlett Packard
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Figure 29: Return on Total Assets Ratios
Year
HP
Industry
2009
6.7%
4.1%
2008
7.3%
8.6%
2007
8.2%
8.9%
2006
7.6%
6.5%
2005
3.1%
7.4%
Return on Common Equity (ROE) – [Net Income / Common Equity]
The return on common equity ratio is useful for comparing the profitability of a
company’s past performance, as well as to that of other firms within the industry. It also
measures a corporation's profitability by showing how much profit a company generates with the
money shareholders have invested. A higher ratio shows increased profit using existing equity.
Figure 30: Return on Common Equity Ratios
Year
HP
Industry
2009
18.9%
12.4%
2008
21.4%
40.2%
2007
18.9%
32.6%
2006
16.2%
22.8%
2005
6.5%
26.6%
Upon analysis of the profitability ratios of HP and the industry, HP was lagging behind
the industry until 2009 when it outperformed the industry by all indicators. In addition, HP’s
profit jumped 14 percent in the first quarter of 2010; indicating that their cost-cutting efforts,
started in 2009, and their push into rival IBM Corp.'s stronghold of technology services is
helping the company absorb the declining sales in most of their major divisions. Deep cost cuts
have accompanied a recent shift in HP's strategy. HP eliminated 19,000 of the 24,600 jobs
expected as part of the EDS acquisition. These cuts have helped increase earnings by reducing
operating costs.
As a yardstick for the health of overall technology spending, HP's latest
numbers reinforce the trends of stronger consumer demand for items such as the new NetBooks.
Hewlett Packard
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Market Value (Valuation or Risk). A company’s market value ratios relate an
observable market value, the stock price, to book values obtained from the firm's financial
statements. These ratios allow a company to evaluate the perceived performance of investors.
These ratios also provide investors a good risk analysis of the company’s current and future
standings in the industry.
Price/Earnings (P/E) – [Price per Share / Earnings per Share]
A high price to earnings ratio suggests that investors are expecting higher
earnings growth in the future. The higher the P/E ratio, the more the market is willing to pay for
each dollar of annual earnings. Companies with high P/E ratios may be considered "risky"
investments as compared to those with a lower P/E ratio. A high P/E ratio signifies high
expectations, thus higher risk.
Figure 31: Price/Earnings Ratios
Year
HP
Industry
2009
12.1
13.5
2008
14.2
16.2
2007
16.5
20.0
2006
15.0
20.6
2005
27.8
24.9
Price/Cash Flow – [Price per Share / Cash Flow per Share]
The price to cash flow ratio compares the stock's market price to the amount of cash flow
generated on a per-share basis. Some analysts consider cash flow as perhaps a company’s most
important financial barometer, and the ratio of stock price to operating cash flow is favored by
many analysts over the price-earnings ratio as a measure of a company’s value.
Hewlett Packard
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Figure 32: Price/Cashflow Ratios
Year
HP
Industry
2009
7.5
9.7
2008
10.1
12.9
2007
12.0
16.1
2006
10.9
16.7
2005
14.1
18.3
Market/Book (M/B) – [Market Price per Share / Book Value per Share]
The market to book value per share expresses the total net assets of a business on a per
share basis. This allows companies and investors to compare book values of a business to the
stock price and gauge differences in valuations. If the ratio is above 1 then the stock is
undervalued; if it is less than 1, the stock is overvalued.
Figure 33: Market/Book Ratios
Year
HP
Industry
2009
2.3
4.2
2008
3.0
7.1
2007
3.1
8.0
2006
2.4
6.7
2005
1.8
9.2
Upon analysis of the market vale ratios of HP and the industry, it can be seen that ratios
for HP have decreased from 2008 to 2009. The decreases seen in 2009 are less than seen in the
industry, thus making HP’s outlook better than many of the industry competitors. Much of this
drop is attributed to the decline in PC sales. With a consumer move towards smaller, lower cost
net books, HP has focused on cost reductions, increased technology services, and wireless
products in an effort to stay competitive within the industry.
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Financial Strengths and Weaknesses (SWOT) Analysis
HP is an industry leader in developing and manufacturing computer, storage, and
networking hardware; designing and developing software applications; and providing IT related
support and services. The company’s recent acquisitions and expansion plans could present
opportunities to increase revenue. But this does not come without significant risk. Competition
in the market, declining PC sales, and recently acquired debt increases could negatively impact
the company’s operational and financial performance.
Figure 34: SWOT Analysis
Strengths
Weaknesses
Operational Performance
Market position
Strong Presence
Resources
Litigations
Limited Liquidity
Opportunities
Threats
Acquisitions/Expansions
IT Outsourcing
Competitive Market
Declining PC Market
Strengths
Operational Performance
During 2009, HP recorded total revenues of 114.5 billion dollars, a slight decrease from
2008, but an overall increase of 32% since 2005. The operating profit of the company was
10,136 billion dollars, an increase of 300% since 2005. The net profit of the company was 7660
billion dollars, an increase of 319% over 2005. HP’s strong performance resulted from increased
revenue across all business divisions. Further, the company's profit margin was 6.7% during
Hewlett Packard
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2009 was above the industry average of 4.6%. This higher than average profit margin could
indicate efficient cost management or it could be the result of strong pricing strategies. HP
experienced their largest profit margin increase (4.0%) from 2005 to 2006. This may have been
due to several cost cutting measures taken starting in 2004. This indicates management's focus
on improving profitability. The company’s growth was fuelled by the growth of information
technology in start up markets around the world. Additionally, the acquisition of other
information technology businesses expanded HP’s operational performance and growth.
Market Position
HP occupies a strong position within the computer & peripheral manufacturing industry.
It is a world leader in the sales of personal computers. It occupies a 19.3% share of the global
PC market. It is also a global leader in imaging and printing systems, and leads the market in
UNIX based servers. HP has the third largest share of the storage market in the Americas and
the second largest share in Europe and the Middle East (www.techtarget.com). HP’s strong
market position enhances its reputation and attracts new investors.
Strong Presence
HP is a global company with a presence in more than 170 countries across the world
(en.wikipedia.org). The company’s products are sold throughout the world through a
combination of retailers; internet partners, distributors and direct sales. Global diversity reduces
the risks associated with adverse economic and political developments in any specific region. In
addition, it increases the company’s growth opportunities. HP’s broad product portfolio also
enables it to have an expansive presence across many of the industries market segments.
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Resources
HP’s return on equity (ROE) was 18.9% during 2009. This was above the industry
average of 12.4%. A higher ROE ratio indicates that the company is efficiently using the
shareholders' money and that it is generating high returns for its shareholders compared to other
companies in the sector.
Weaknesses
Litigations
HP has been involved in various litigations which could hinder its overall brand name in
the eyes of investors and customers. HP is currently under investigation by the US Securities
and Exchange Commission for leaking board-level information to public in 2006. Additionally,
such issues forced several of its board members to resign, which could hamper its overall
industry goodwill. In 2006, several CNET reporters filed suit against HP over a pretexting
scandal. In 2005, HP settled all ongoing patent litigation with Intergraph Corporation, and the
companies entered into a patent cross-license agreement. The agreement resolved all legal
claims between the two companies. Again in 2007, HP and Acer settled patent litigation. HP
also acquired litigations against EDS when it purchased the company in 2008. EDS, now HP
Enterprise Services, is a defendant in a lawsuit in the United Kingdom filed by Sky Subscribers
Services Ltd and British Sky Broadcasting in 2004. Such litigations and continuous leaking of
information by broad members hampers the company’s overall image.
Limited Liquidity
HP’s current ratio was 1.22 at the end of 2009 and as low as 0.98 in 2008. This remains
below the industry average of 1.56 and 1.47 respectively. A lower than average current ratio
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indicates that the company could be in a weaker financial position than other companies in the
industry.
Opportunities
Acquisitions/Expansions
HP expects to benefit from its acquisitions and expansion plans. In 2008, HP made
several corporate acquisitions and expansions. The largest acquisition was Electronic Data
Systems, at a cost of 13 billion dollars. This acquisition made HP the second largest producer of
large-scale corporate data systems. HP also acquired Colubris Networks Inc., a global provider
of intelligent wireless networks for enterprises and service providers. In October 2008, HP
announced intentions to expand operations in Chongqing (China) for the manufacture of
notebook and desktop PCs for Chinese customers. The company continues to add new products
to its portfolio, including high-end digital printers and notebooks with "Touchsmart" technology.
HP believes these acquisitions and expansion activities will accelerate growth.
IT Outsourcing
Many companies continue to outsource IT services, and this trend is expected to grow.
IT outsourcing is forecasted to rise over 300 billion dollars in 2010. This global increase is being
experienced in many developing markets in India, China, Europe, and North America. HP has
positioned itself as an industry leader in IT outsourcing across the world. With HP’s presence in
more than 170 countries, they are well positioned to gain a large piece of the outsourcing market.
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Threats
Competitive Market
HP faces stiff competition in all of its industry markets; competing with other well
established corporations such as Dell, IBM, Apple, and Sun Microsystems to name a few. In
addition, it faces competition from a large number of new start-up, rapidly growing firms. In the
enterprise storage and servers industry, HP faces competition from major competitors in both
standard and UNIX-based servers. Competitors in PC production and sales include Dell, Acer
Inc, Apple Inc., Lenovo Group Limited, and Toshiba. The major competitors in Imaging and
Printing include Canon USA Inc, Lexmark International Inc, Xerox Corp, Seiko Epson Corp,
Samsung Electronics Co, and Dell. The ever present competition in these markets could
adversely affect HP’s market share and business position. The current global economic
slowdown has also shown to be a major factor in product consumption.
Declining PC Market
HP is the second largest producer of PCs in the world, with a market share of 19.3%.
They generate about one-third of their revenues from the sale of PCs, but only 10% of sales.
However, PC sales have declined steadily over the last several years. PC prices (margins) have
also been dropping in order to compete with the popular NetBooks and mobile technologies.
VALUE-BASED FINANCIAL ANALYSIS AND RECOMMENDATIONS
Strategy for Increasing the Company’s Value
In conclusion, this paper provides some recommendations for HP to increase the value of
their corporation. Following are three recommendations for HP’s consideration:
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Strategic Partnerships. HP recognizes the importance of strategic partnering to take
advantage of partner’s strengths. In the case of Compaq and Electronic Data Systems, HP bought
them outright in order to take advantage of their service structures. HP may consider the
potential benefits of partnering with Amazon, Sony, and Barnes & Noble as a hardware parts
supplier to all of the major electronic readers. Profit margins are low in the hardware industry,
except for probably in this area. An additional way to address the low product margins is to
partner with Apple as a hardware supplier for their continual new lines of iPod, iPhone, iPad, etc.
– as Apple sells their hardware at a premium price.
Services. Continuing to focus on services in the foreseeable future, as HP is doing is
recommended as there does not appear to be any significant changes in the fundamentals for the
IT services market.
R&D. Invest in research and development (R&D). HP would do well to create the next
iPod, the next Kindle, the next XYZ. A new innovative way to approach R&D investment is to
tap the invention market by purchasing a portfolio of patents. Recently in Harvard Business
Review an article identified a new multibillion dollar patent firm that sells packages of patents.
These packages include 1000’s of patents, some ready to turn into a product and enter quickly
into the market; other patents are more risky and may not pay off. However, the firm tries to
ensure that a company purchasing a portfolio of patents can reasonable create products along a
certain idea and will not end of blind-sided by patent litigation or end up in a hand-tied situation
due to missing a critical patent to complete a product as new products are introduced to market.
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http://stockmarketperformance.net/historical-stock-market-performacne.html
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showStockReport.do