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HP's thinning Hurd
Job cuts are a good start but HP CEO Mark Hurd needs to do more to get the company back on track.
July 19, 2005: 3:29 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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HP CEO Mark Hurd was expected to cut costs when he was hired in March. So Tuesday's job cut announcement is not a big surprise.
HP CEO Mark Hurd was expected to cut costs when he was hired in March. So Tuesday's job cut announcement is not a big surprise.
Thundering Hurd: HP has outperformed rivals IBM and Dell since Mark Hurd took over as CEO.
Thundering Hurd: HP has outperformed rivals IBM and Dell since Mark Hurd took over as CEO.
INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER upgrades & downgrades earnings & warnings public offerings INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER

NEW YORK (CNN/Money) The Mark Hurd era at Hewlett-Packard is off to a promising start. Shares are up more than 25 percent since Hurd, formerly the CEO of NCR, took over the helm in March.

One reason for the surge was an expectation that Hurd, known as a relentless cost-cutter, would make big changes to HP's organizational structure -- including layoffs -- to boost profits.

Hurd delivered on Tuesday. HP (Research) announced that it would cut 14,500 jobs, nearly 10 percent of the company's total workforce. Wall Street seemed to think the moves made sense.

In fact, though, some analysts had thought HP would layoff as many as 25,000 workers, and the stock fell slightly on Tuesday morning following the announcement.

And investors have to wonder if the stock might continue to retreat in the near-term.

"This is the last major positive catalyst for the stock," said Brent Bracelin, an analyst with Pacific Crest Securities. "Going forward, shares should track more closely with the fundamentals of the business because now investors will be focused on execution."

Needs to be like Dell in more ways than one

Sooner or later, HP is going to have to do more than cut costs. Former CEO Carly Fiorina learned that the hard way. She was fired this February, a casualty of the company's poorly executed merger with Compaq, a deal that she championed.

Fiorina's biggest problem was not a bloated cost structure. It was that HP was losing ground to IBM (Research) and Dell (Research) in the server, personal computer and storage markets.

For example, according to a report from tech industry research firm IDC that was released Monday, Dell's market share lead over HP in the personal computer market widened in the United States and worldwide during the second quarter.

In addition, profit margins have slipped in printers, HP's crown jewel business, due to tough competition.

Overall quarterly sales and profit results have been wildly inconsistent since HP bought Compaq in 2002. That has to change.

The biggest challenge HP faces is to show that it can increase revenues while simultaneously cutting costs.

"We have to grow our company, invest and deal with competitive forces at the same time we need to be efficient on the cost side," Hurd said during a conference call with analysts on Tuesday.

In other words, HP needs to be more like Dell. HP has even gone as far as to hire a former Dell executive. Last week, the company announced that Randall Mott, formerly the chief information officer of Dell, joined HP as its new CIO.

Mott had been CIO at Dell since 2000 and before that spent 22 years at Wal-Mart Stores (Research) -- another company known for a laser-beam focus on costs.

HP on the attack?

Hurd added during the conference call that the company would soon "go on the attack." So HP is at least talking about doing more than cutting costs. But he didn't specify what this meant.

So how exactly will HP boost its sales? Hurd indicated that HP will keep spending heavily on research and development to keep up with the competition. That is a good sign.

"HP is not going to be cutting R&D or the innovation that the company is known for. What they are doing is prudent," said Shaw Wu, an analyst with American Technology Research.

But will that be enough? One analyst asked Hurd during the call if acquisitions would be part of the future. It's an interesting question since it comes at a time when some vague rumors have circulated about HP being interested in purchasing Eastman Kodak (Research).

Kodak's name did not come up specifically during the call but Hurd appeared to dismiss any thoughts that HP would soon do a major deal. "I'd never say never but a merger isn't the core focus of what we're looking at," he said, adding that any deals would have to be "digestible and manageable" and not "muddy the waters" in the near-term.

Considering that Kodak has a market value of $8 billion and nearly 55,000 employees, it's hard to imagine HP pulling off a deal of this scope without causing some major merger integration headaches.

Hurd also shot down thoughts during a call with reporters Tuesday that HP would look to sell off any of its business lines.

So it looks like for the foreseeable future, HP will need to generate stronger than expected revenue growth with its existing product portfolio.

Positive second-quarter results from IBM on Monday are a good sign that corporate demand appears to be improving for servers, software and services, all areas that HP has a presence in as well. But there is skepticism about whether HP will be able to capitalize on this.

"The job cuts don't change the competitive dynamic in the printers, server and storage markets. Will these changes help stem the share losses? That's certainly less clear," said Bracelin.

What's more, SG Cowen analyst Richard Chu pointed out in a report Tuesday that the key near-term question mark for HP is whether or not some revenue could be at risk in the coming quarters as a result of disruption from the job cuts.

It might be time for HP investors to play wait and see before making any bigger bets on the company. The stock has already had a huge run and the easy money has been made.

For more about HP's job cuts, click here.

For more about IBM's strong 2Q earnings report, click here.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with the companies.


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