August 19, 2011 / 12:31 PM / 8 years ago

UPDATE 6-HP sinks as investors flee business revamp

* HP is doing too much at once -analysts

* Uncertainty likely to hurt PC sales -analysts

* Transformation may be expensive, drawn out

* Analysts downgrade stock, cut price targets

* Shares close off 20 percent, worst day since 1987 (Adds analyst comment, share price update)

By Sinead Carew and Sayantani Ghosh

NEW YORK/BANGALORE, Aug 19 (Reuters) - Hewlett-Packard Inc (HPQ.N) shareholders delivered a sharp rebuke to CEO Leo Apotheker, wiping out $16 billion from the company’s market value on concerns that his plan to revive the No. 1 PC maker could do more harm than good in the near term.

The company’s shares fell 20 percent on Friday after a rash of announcements including a costly $11.7 billion acquisition, the killing of its tablet computer and a drawn-out review of its PC business that could lead to a spin-off. [ID:nN1E77H1JI]

On top of this, the company cut its full-year profit and revenue targets, resulting in the biggest drop of HP shares in a single day since Black Monday in 1987.

While Apotheker’s decisions appeared to make sense for the long term, the worry is that they will take too long to realize and cost to much, analysts said.

“It’s a lot to get your arms around,” Robert W. Baird analyst Jayson Noland said.

One big worry is that uncertainty surrounding the PC business will cause HP’s corporate customers to switch to rivals like Dell Inc DELL.O.

HP has been struggling in the PC market as niftier gadgets like iPad have lured away consumers. But it should not have told the world it would take 18 months to determine the fate of its PC business, which brings in 16 percent of its profits, said Sterne Agee analyst Shaw Wu.

“Why would anybody want to do business with them if it’s up for sale?” said Wu. “To have this in limbo for 12 months is going to be pretty material.”

Investors also worried that HP’s offer of nearly $12 billion for British software company Autonomy Corp AUTN.L was too high, even if software is a high-profit business.

“If you told me (the price) was half that it would seem more in line,” said Noland, adding that the timing was bad. “Their numbers are deteriorating and they’re trying to transform in the middle of a really bad economy.”

Analysts also questioned why HP was giving up so soon on the mobile business it bought for $1.2 billion from Palm Inc PALM.O — even as they doubted HP would ever defeat Apple Inc (AAPL.O), whose iPad and iPhone crushed Palm’s sales.

“There’s not a lot of confidence in (Apotheker’s) management,” said Wu. “This is just further proof.”

HP shares closed at $23.60 on Friday, making it the biggest loser in the S&P 500 Index .SPX, which fell 1.5 percent. Before the announcements, HP's shares had closed at $31.39 on Wednesday. Dell shares closed up nearly 2 percent on Friday.

“Last night HP may have eroded what remained of Wall Street’s confidence in the company and its strategy,” Needham & Co said in a research note.

Thursday’s weak financial forecast from HP follows smaller rival Dell’s lowered revenue outlook earlier this week that dragged down both stocks. [ID:nL3E7JH1ZW]

Both companies have been venturing out of traditional comfort zones and into enterprise solutions and services, but continuing soft sales have been a constant source of trouble.

At least two brokerages downgraded HP, and five cut their price targets, mainly citing uncertainty and expenses related to the restructuring.

Palo Alto, California-based HP said it has already stopped production devices like its TouchPad tablet, which were were based on the WebOS software it acquired from Palm. While the WebOS system has attracted a lot of media attention and admiration from technology analysts , it ultimately failed to attract buyers.

“It seems like a knee jerk reaction but I want to think its the right decision,” Noland said. “It was a lot of cost and a fairly large distraction over the last 9 months.”

Some analysts suggested that another company might buy the WebOS business or Palm patents but even if this Noland said he did not expect HP to make its investment back.



Graphic on Q2 tech results:

Breakingviews [ID:nN1E77I0O8]


Gleacher & Co analyst Brian Marshall cut his price target for HP to $39 from $50 saying he “materially underestimated the magnitude and timing of this metamorphosis.”

He said, however, that HP “is undergoing a sound strategy transformation by focusing on high-growth, high-margin opportunities in the enterprise/commercial markets.”

With a forward 12-month price-to-earnings ratio of 5.6, the company is trailing its peers, including Dell, Apple (AAPL.O) and IBM (IBM.N), according to Starmine SmartEstimate.

Before Thursday’s news, HP’s stock had already lost nearly a fifth of its value since it reported quarterly results in May.

Brokerage Robert W. Baird said HP is no longer a “safe haven” stock, and he expects it to lose market share.

A decision by HP to spin off the PC business could hurt Intel <(INTC.O), the world’s largest supplier of PC chips, brokerage Nomura said in a note. Intel’s shares closed nearly 3 percent lower on Friday. [ID:nL4E7JJ28V]

Cypress Semiconductor Corp (CY.O) — the main supplier of touch controllers for TouchPad — will also hurt if the company pulls the plug on the product, brokerage Collins Stewart said.

Cypress’ shares fell 4 percent on Friday. (Additional reporting by Rachel Chitra in Bangalore; Editing by Dave Zimmerman, Gary Hill)

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