Hewlett-Packard draws in the value crowd
SAN FRANCISCO (MarketWatch) -- It appears Hewlett-Packard shares, trading at seven-year lows and around 4.5 times forward profit estimates, were just too cheap for value investors to pass up during the second quarter.
From April 1 through June 30, value-bent money managers, including highly-regarded Seth Klarman, bulked up or took fresh stakes in H-P (HPQ) , one of the world's largest sellers of personal computers that's trying to find its way.
"Hewlett-Packard has turnaround potential that few yet believe in," according to Phillip McClain of McClain Value Management, which moved into the stock during the quarter, buying 506,850 shares as of June 30.
Klarman's Baupost Group bought 9.6 million H-P shares, elevating its stake by 56% to 26.8 million shares during the quarter. Activist investor Ralph Whitworth, who secured an H-P board seat last November, nearly doubled his position to 34.5 million shares.
H-P's largest shareholder Dodge & Cox (DODGX) , a mutual fund operator with solid long-term returns, acquired 1 million shares, lifting its holdings to 139.5 million shares. In addition, Jeremy Grantham's GMO LLC bought 9.6 million shares, taking its stake to 38 million shares.
These stepped up bets -- detailed in 13-F regulatory filings that listed stocks owed as of June 30 -- come as H-P has found itself in a deep slump. There's been management changes, boardroom blunders, huge write downs for past acquisitions, and a wavering strategy on how to compete on both the consumer and corporate technology fronts.
Recently, UBS analyst Steven Milunovich revived the debate on whether H-P should be broken up.
H-P shares, including dividend payments, have tumbled 37% over the past 12 months, making it the top decliner among the Dow 30 for that period. By comparison, the Dow (DJIA) is up 19%, once accounted for dividends, FactSet data shows.
H-P shares closed Friday flat at $19.52. The stock is trading right around its book value, according to FactSet, suggesting that investors aren't valuing its future business prospects at all.
Under new CEO Meg Whitman, H-P just embarked on another restructuring that's intended to cut up to $3.5 billion in annual costs by 2014. The savings will be plowed into research and development geared toward cloud-computing, data servers and security software.
Value investors, it seems, believe H-P can right the ship and fortify its dominant market positions in PCs, printers and servers. H-P's margins have contracted, while free cash flow sunk to $1.2 billion for the six month period ended April 30 from $4.6 billion in the same period a year ago.
H-P is a "tough World War II battleship that has taken a couple of torpedoes broadside, but refuses to sink," contend Larry Pitkowsky and Keith Trauner, who run the
"Currently under repair, we believe this vessel will be returned to useful service by a new board and CEO, who seem intent on returning to basics, reinvesting in R&D, and using still-copious cash flows more intelligently to strengthen the business and shareholder returns," Pitkowsky and Trauner added in a mid-year report to their shareholders.
H-P has work to do. For the six months ended April 30, profit tumbled 38% to $3 billion from the same 2011 period while sales had slipped 5% to $61 billion. Cash on hand was $8.3 billion.
As value-minded investors hoard H-P shares, there is a risk H-P becomes a "value trap" like