(MONEY Magazine) – Fiorina pushed through a controversial merger with Compaq Computer in 2002 designed to bolster HP against Dell and IBM. But bigger hasn't been better. HP's hardware units have struggled, and the company's inconsistent earnings performance irked Wall Street. In February, Fiorina, a better evangelist than operating executive, got the ax, a $21 million severance package and $24 million in stock options. HP investors should be so lucky. At $20, the stock hasn't budged in four years. But HP has plenty going for it, including a dominant market share in printers, so a buyer of the stock today could make out nicely on a turnaround or a restructuring. "Now I will take another look," says Michael Mahoney, managing director with hedge fund EGM Capital.

HP'S IMAGE PROBLEM

Under former CEO Carly Fiorina, HP got a lower valuation from investors than its competitors did.

NOTE: [1] 2005 calendar year. SOURCE: Thomson/Baseline, as of Feb. 22.

HP's printing and imaging business has performed admirably, even after the merger. It generated a profit margin of almost 16% last year, more than two points higher than the number posted by top rival Lexmark. The company has also bulked up in tech services, another business that's more profitable than selling computers. Again, margins were encouraging. IBM, the industry's leader, posted results just two-tenths of a point higher than HP's 9.2%.

The strength in printing and services, which account for nearly half of HP's sales, is a big reason analysts expect HP to post earnings gains of 13% this year. "There's a lot there for a new management team to work with," says Wendell Perkins, manager of the Johnson Family Large Cap Value fund.

There's also what value investor Ben Graham liked to call a "margin of safety." HP pays a dividend of 1.5%, and it has nearly $6.4 billion in cash, after debt. It might take a while for the stock to move, but this company isn't near a financial crisis.

Fiorina's departure doesn't mean the cloud over HP's stock has lifted. It's unreasonable to expect big gains until a new CEO is brought on, and even then, Wall Street will remain wary until Hewlett-Packard starts consistently hitting its earnings projections.

Fiorina's replacement must find a way to solve the problems in the hardware businesses, sell those operations or split up the company in some way that earns a higher valuation for HP's solidly performing parts. Until then, continuing profit woes from the PC and server business will drag down overall earnings. Then there's Dell, which is making a big push into printers. That appears to be hurting the HP unit's profit margin, which dipped to 15.4% in HP's fiscal first quarter of 2005.

Matthew Kelmon, president of Kelmoore Investment Co., maintains that there's no good reason to rush in and purchase HP. "Change is good," he says, "but there's still no plan."

The time to buy is when sentiment is bearish. If a new CEO splits up HP, investors could reap handsome rewards. Michael Cuggino, president of Pacific Heights Asset Management, estimates that the company's assets would be worth perhaps $30 a share in a breakup, 50% more than the current price. Even without a restructuring, the stock looks like a bargain. Shares trade for about 14 times fiscal 2005 earnings estimates. Bill Gorman, an analyst with PNC Advisors, says HP deserves a valuation closer to IBM's and Lexmark's (see the chart above). A multiple of 16 is fair, he says, which would lift HP shares 20% to about $24.