Take a look at HP
Hewlett-Packard CEO Mark Hurd is expected to put execution ahead of vision. That's why it's time to buy the stock.
By Adam Lashinsky

(FORTUNE Magazine) – ON MAY 17, IN HIS FIRST QUARTERLY earnings call as chief executive of Hewlett-Packard, Mark Hurd talked fast and promised results-yet divulged precious little about his plan to revive the beleaguered tech giant. There was no grandiose vision, no elaborate roadmap for restructuring. Just a healthy dose of jargon-coated talk about "efficiency" and cost cutting.

But Hurd's brand of boring corporate-speak was exactly what a growing number of HP bulls were longing to hear. Since the company's board ousted Carly Fiorina in early February, some of the country's savviest value investors, including the team at the top-performing Dodge & Cox Stock fund, have been aggressively buying shares of Hewlett-Packard (HPQ, $23). Their reasoning: All the company needs to prosper is a manager with an old-fashioned eye for detail rather than a nose for the spotlight.

That is exactly what HP has gotten in Hurd. During his 25 years at computer services company NCR, Hurd demonstrated a painstaking attention to daily operations in the divisions he ran. When he took over as CEO of NCR in 2003, the company's shares were trading at $10. Hurd initiated an eight-quarter plan to cut $250 million in costs. By the time HP called he was well ahead of schedule and NCR's stock had leapt to $37.

Can Hurd engineer that kind of turnaround at Hewlett-Packard? The stock's fans are confident he can. HP has long been one of the market's most tantalizing value plays. In the three years since the merger with Compaq Computer, optimistic investors have been clinging to this bullish argument: HP's entire market valuation is roughly equivalent to the worth of its industry-leading and highly profitable printer business. That means Wall Street has been valuing the nonprinter divisions-including PCs, server and storage computers, software, and IT services, which make up two-thirds of the company's revenues, or about $55 billion a year-at zero. So all it would take to get the stock moving is modest but consistent profitability in the other businesses."The upside is huge, and the downside is virtually nonexistent," says Richard Pzena, whose New York investment fund holds about 22 million shares.

Despite Hurd's reticence, industry pros familiar with his style have an outline of how he's approaching the task at hand. The performance of the stock, they say, ultimately depends on how well Hurd executes these three turnaround strategies:

Cut until it hurts. Hurd already has signaled that investors should expect relatively serious cost-cutting in the form of layoffs. Steven Milunovich, an analyst with Merrill Lynch and a vocal critic of Fiorina's strategy, estimates that Hurd will slash 5% to 10% of HP's overall workforce-7,500 to 15,000 people-resulting in annual savings of 21 cents to 42 cents a share.

Raise the bar. In his few public comments, Hurd has let slip that HP is "off benchmark" in numerous areas, notably in the amount of money it spends on information technology, the very product it sells to others. Previously, HP had been satisfied to measure itself against industry averages. Hurd says he expects better. Last year, for example, HP disclosed that it spends about $18,500 per employee on IT. The Hackett Group, an Atlanta-based consulting firm that specializes in benchmarking, reports that "world class" companies such as GE hold IT spending down to about $8,700 per employee. One such company that Hackett has advised is NCR-when Hurd was CEO. "Mark obviously really liked that process," says Richard Roth, Hackett's chief research officer. "It gives him specific action items."

Keep his promises. With its periodic revenue and earnings misses plus its failure to achieve its own merger goals (see "Why Carly's Big Bet Is Failing" on Fortune.com), HP became a hated stock on Wall Street. Merrill's Milunovich guesses that on a scale of one to ten, sentiment on HP has gone from two under Fiorina to five under Hurd. In other words, much improved but still plenty of room to get better.

So how high could the stock go? If Hurd can execute his short-term plan, analysts say, it could reach the high 20s or low 30s. Pzena, more bullish than most, believes it will hit $35. With a market cap of $66 billion-a fraction of HP's expected 2005 sales of $86 billion (IBM trades for 1.2 times sales; Dell fetches 1.7 times its revenues)-HP has plenty of room to stretch.

Even if he whips the company into shape quickly, Hurd, 48, is facing long-term challenges. HP has struggled with razor-thin margins on computers and-worse-inconsistent results. In addition to fixing those problems, Hurd must figure out a way to outdo Dell, the low-cost hardware maker, and IBM, the biggest IT services provider. "Hurd can improve the stock in the short to medium term, because it's cheap," says Toni Sacconaghi, an analyst with Bernstein Research. "But HP will perennially be forced to reduce its costs to sustain operating margins." A difficult chore, for sure. "Almost no one believes HP can come out of this a great company again," Milunovich says. But if Hurd can live up to his reputation, it might turn out to be a great investment.

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