TABLE OF CONTENTS EXECUTIVE …professorahmed.com/Download/Sample_Paper2.pdf · FIGURE 34: SWOT...

TABLE OF CONTENTS

EXECUTIVE SUMMARY…………………………………………………………… 7

INTRODUCTION……………………………………………………..……….……… 7

The Hewlett-Packard Company………………………………………………. 7

Hewlett-Packard Company Background……………………………………... 8

Hewlett-Packard Products and Services……………………………………… 11

Hewlett-Packard Management and Leadership……………………………… 13

Hewlett-Packard Mission, Goals, and Objectives...…………………….…..… 14

Hewlett-Packard Vision…...……………………………………………….…… 15

Hewlett-Packard Cultural Business Values………..……………………..…… 16

Hewlett-Packard Cultural Business Ethics………………………………..…… 17

Hewlett-Packard Industry Competition………………………………….……. 17

Hewlett-Packard Competitive Strategies………………………………….…… 18

Hewlett-Packard Growth and Market Position; Sales and Assets…………… 20

Hewlett-Packard Social Responsibility………………………………….……… 20

MARKET OUTLOOK………………………………………………..……….……… 21

Introduction to the Stock Market……..………………………………….……… 21

Historical Performance………………..………………………………….……… 25

Future Outlook………………………...………………………………….……… 28

Hewlett Packard - 2 -

INDUSTRY OUTLOOK………………………………………………..……….……… 30

Nature of the Industry……………………….………………………………..…… 30

Type of Composition……………………..………………………………….……. 31

Average Industry Growth………………………………………………….…… 31

Opportunities and Threats in the Industry………………………….…………… 33

Future Outlook…….………………….………………………………….……… 34

FINANCIAL STATEMENT ANALYSIS……………………………..……….……… 35

General Discussion of HP Financial Statements………………………….……… 35

Financial Ratios……....………………..………………………………….……… 42

Common Size Statements……………..………………………………….……… 42

Cash Flow Analysis……………..………………………………..……….……… 46

STRENGTHS AND WEAKNESSES ANALYSIS………..…………..……….……… 47

Financial Ratio to Industry Analysis……....……………………..……….……… 47

Financial Strengths and Weaknesses (SWOT) Analysis………………….……… 58

VALUE-BASED FINANCIAL ANALYSIS AND RECOMMENDATIONS...……… 62

Strategy for Increasing the Company’s Value…………....…..…..……….……… 62

REFERENCES.......................................................................................................……… 64


LIST OF FIGURES

FIGURE 1: Anatomy of a Trade ………………..…………………………… 24

FIGURE 2: Dow Jones Historical Trends …………………………………… 25

FIGURE 3: Dow Jones Industrial Average 1900-Present Monthly..………… 26

FIGURE 4: S&P 500 Index 1960-Present Weekly..………………….……… 27

FIGURE 5: Dow Jones Industrial Average 1960-Present Monthly..………… 27

FIGURE 6: NASDAQ Composite 1978- Present Weekly………….………… 28

FIGURE 7: Products and Services Segmentation..…………………………… 31

FIGURE 8: Real Growth..………………………………..…………………… 32

FIGURE 9: Revenue and Revenue Growth Rate..…………….……………… 32

FIGURE 10: Income Statement, Hewlett-Packard..…………….……………… 36

FIGURE 11: Statement of Operation, Hewlett-Packard……….……………… 36

FIGURE 12: Balance Sheet, Hewlett-Packard..…………….………..………… 37

FIGURE 13: Asset Structure, Hewlett-Packard..…….………….……………… 38

FIGURE 14: Liabilities & Equity Structure, Hewlett-Packard...……………… 38

FIGURE 15: Cash Flow Statement, Hewlett-Packard..……….……………… 39

FIGURE 16: Cash Flow Activity, Hewlett-Packard..…………….…………… 40

FIGURE 17: Cash Flow Analysis, Hewlett-Packard..………….……………… 40

FIGURE 18: Common Size Income Statement, Hewlett-Packard..…………… 43

FIGURE 19: Common Size Balance Sheet, Hewlett-Packard..…...…………… 45

FIGURE 20: Current Ratios..………………………...………….……………… 49

FIGURE 21: Quick Ratios..…………………………..………….……………… 49


FIGURE 22: Inventory Turnover Ratios………….…………….……………… 50

FIGURE 23: Days Sales Outstanding Ratios……..…………….……………… 51

FIGURE 24: Fixed Asset Turnover Ratios..………….………….……………… 51

FIGURE 25: Total Asset Turnover Ratios………...…………….……………… 52

FIGURE 26: Debt Ratios..…………………………………….….……………… 53

FIGURE 27: Profit Margin Ratios..…………………..………….……………… 54

FIGURE 28: Basic Earnings Ratios..………………….…………...…………… 54

FIGURE 29: Return on Total Ratios..…………….……………………..……… 55

FIGURE 30: Return on Common Equity Ratios..…...….……….……………… 55

FIGURE 31: Price/Earnings Ratios..…………………….……….……………… 56

FIGURE 32: Price/ Cashflow Ratios..…………………………...……………… 57

FIGURE 33: Market/Book Ratios……………………………….……………… 57

FIGURE 34: SWOT Analysis……………………...…………….……………… 58


LIST OF ATTACHMENTS

ATTACHMENT 1: Raw Financial Data

ATTACHMENT 2: Processed Finance Data


EXECUTIVE SUMMARY

This paper provides a comprehensive financial analysis of Hewlett-Packard, a leading

U.S. computer & peripheral manufacturing corporation. The paper begins with some general

information pertaining to Hewlett-Packard, including company background, products and

services, current management, mission and objectives, cultural business values and ethics,

competitive strategies, and their overall market position. The paper will then discuss the state of

the market, including historic performance and future outlook. Following this, the paper

provides an industry outlook, covering the industry’s nature and composition, growth,

opportunities and threats, and future outlook. Once this foundation is laid, the paper will provide

a comprehensive ratio to industry analysis of Hewlett-Packard; to include an analysis of their

financial strengths and weaknesses, and their overall level-of-performance within the industry.

Finally, the paper concludes with a value-based financial analysis of Hewlett-Packard, and

provides some recommendations for improved market performance. Upon completion of this

paper, the reader should have a very broad understanding of the overall market and the computer

& peripheral manufacturing industry, as well as an in-depth knowledge of Hewlett-Packard’s

financial standings and their current position within the market. With that, let’s begin…

INTRODUCTION

The Hewlett-Packard Company

Hewlett-Packard, commonly referred to as HP, is one of the largest Information

Technology (IT) companies in the world. Headquartered in Palo Alto, California, HP is a global

corporation that operates in over 170 countries across the world (en.wikipedia.org). HP

specializes in 1) developing and manufacturing computer, storage, and networking hardware, 2)

designing and developing software applications, and 3) providing IT related support and


services. HP markets its products to individual users, as well as small, medium, and large

businesses (Annual Report, 2009). Their value chain distribution channels consist primarily of

consumer-electronics and office-supply retailers, and their software partners (en.wikipedia.org).

But they also sell directly to consumers through internet based e-stores.

HP is highly diversified across several IT market segments, providing a wide portfolio

that encompasses everything from digital cameras to digital entertainment, and from home

computers and peripherals to powerful supercomputer networks. On the services side, they

cover the spectrum from product support for individual customers to enterprise solutions and

support for small and medium size businesses. No other corporation offers as complete an IT

product portfolio as HP (www.hp.com). This broad diversification provides HP a distinctive

competitive advantage when it comes to providing the right product and service solutions to a

vast array of consumer requirements.

Hewlett-Packard Company Background

William Hewlett and David Packard started the Hewlett-Packard Company in a small

Palo Alto, California, garage in 1939. They stood the company up with an initial capital

investment of $538. HP was incorporated on 18 August 1947, but the HP trademark was not

filed until November 1954. The company went public on 6 November 1957 (en.wikipedia.org).

In the beginning, HP was not very focused. As they searched for their market position,

they worked on a wide variety of industrial electronic products (en.wikipedia.org). After a

couple successes, they decided to focus on design and production of high-quality electronic test

and measurement equipment. Within 10-years, they built a solid reputation for innovative,

reasonably priced test equipment. Their most distinguishing feature was providing


instrumentation sensitivity, accuracy, and precision not met by comparable rivals

(en.wikipedia.org). In the late 1950s, HP spun off a small company named Dynac to specialize

in digital electronics equipment. The company was later renamed Dymec, which in 1959 was

folded back into HP. At this time, HP began building digital electronics equipment using

minicomputers manufactured by other companies. By 1966, HP entered the computer market

and began building their own microcomputers (en.wikipedia.org).

Initially, HP was not considered a credible computer company like IBM, who was well

known for their large main-frame computers. But that would soon change as they began to apply

their novel innovation and design skills towards developing small but powerful desktop

computer systems. In 1968, they become the first manufactures of mass-produced personal

computers (PCs). HP initially marketed these PCs as desk-top calculators because they believed

they would be ridiculed by the industry if they called them computers (en.wikipedia.org).

Regardless, these PCs were an engineering marvel at the time because their logic circuits were

entirely assembled with discrete components. A PC system, which included a CRT display,

magnetic-card storage, and printer was priced for around $5000 (en.wikipedia.org), which was a

significant amount of money at that time.

Over time, HP developed global respect for being the first-to-market producer of many

advances in electronic calculators. They introduced the first handheld scientific calculator in

1972 and the first handheld programmable calculator in 1974. From the beginning, HP’s design

philosophy was to “design for the guy at the next bench” (en.wikipedia.org), and their products

quickly gained a strong reputation for quality and user friendliness.


In 1984, HP introduced inkjet and laser printers for use with their desktop PCs. These

printers were a great technological advancement beyond the dot matrix printers of the time. To

enable them to stay on the leading edge of the rapidly evolving printer industry, HP partnered

with Cannon (who was already partnered with Xerox) to develop a highly successful line of all-

in-one printer/scanner/copier/fax machines. The print mechanisms for these printers were based

almost entirely on Canon components, which in turn used technology developed by Xerox. HP

developed proprietary hardware, firmware, and software that converted data into dots for the

mechanism to print (en.wikipedia.org). This provided HP a technology advantage that could not

be easily copied by rivals. In addition to their many partnerships, HP also grew through

acquisition strategies; buying Apollo Computer in 1989 and Convex Computer 1995.

By the mid 1990s, HP began to expand their computer product line to reach common

consumers. Up until this point, their sales strategy was primarily targeted towards university,

research, and business users (en.wikipedia.org). Although HP did quite well selling PCs and

peripherals through their value chain distributors, they desired a closer relationship with their end

customers. To accomplish this, they opened hpshopping.com in the late 1990s as an independent

subsidiary that sold directly to customers online. This initiative was very successful; providing

direct customer feedback that HP used to further customize their product lines. This enabled HP

to be very receptive to their customers’ needs and resulted in strong consumer loyalty. In 2005,

the HP on-line store was renamed the “HP Home & Home Office Store.”

To sustain its edge in rapidly advancing digital technology, in 1999 HP made a drastic

change in their business strategy to focus strictly on their core competencies related to computer,

storage, and imaging devices. At that time, all their businesses not directly related to this core


competency were spun off to form a new corporation called Agilent (en.wikipedia.org). HP was

now entirely dedicated towards computer, storage, and imaging products, software, and services.

Between 1999 and 2005, HP experienced extremely turbulent times. During this period,

the market halved HP’s value commensurate with the industry average, and the company

incurred heavy job losses (en.wikipedia.org). It was during this time that HP acquired Compaq.

Compact was also an IT industry leader (having itself bought Tandem Computers in 1997 and

Digital Equipment Corporation in 1998), but it was struggling from recent declines in sales and

revenues. This acquisition strategy resulted in HP becoming a top-3 player in the desktop,

laptop, and server industry (en.wikipedia.org). Soon following this merger with Compaq, HP’s

new symbol became HPQ; incorporating the “Q" logo Compact had used on all of its products.

In 2006, HP reinvented its business strategy with a new campaign slogan, “The Computer

is Personal Again” (en.wikipedia.org). This campaign was focused on the preface that the PC is

a personal product. The campaign utilized the newest information age marketing methods,

including viral marketing, sophisticated visuals, and its own web site. With the financial crisis

facing the US and global economies beginning in 2007, HP was increasingly pressured to again

diversify beyond their existing market areas. As a result, in 2009 HP acquired 3 Com for $2.7

billion in cash (en.wikipedia.org). This move initiated HP’s immersion into the enterprise

networking market currently dominated by Cisco. Only time will tell how well this

diversification will pay off for HP.

Hewlett-Packard Products and Services

As discussed earlier, HP’s product lines are focused on personal computing devices,

enterprise servers, storage devices, printers, and other imaging products. Specific products


produced by HP include workstation computers, home & small business computers, servers,

printers, scanners, digital cameras, calculators, PDAs, and associated software applications

(www.hp.com). In addition to producing hardware and software, HP also provides a vast array

of services for designing, implementing, and supporting IT infrastructures.

Today, HP’s distinctive competencies that give them a competitive edge within the

industry are related to the production of innovative imaging & printing systems and solutions.

They are the world’s leading provider of inkjet and laser jet printers, printer consumables (ink

and toner cartridges), all-in-one multifunction printer/scanner/faxes, large format printers, printer

management software, output management software suites, optical recording technology, digital

cameras and photo printers, photo sharing and photo products services, and iPhone software

applications (www.hp.com).

In addition, based on unit volume shipped and annual revenue, HP is today’s world

leading producer of personal computers (www.hp.com). Such products include business PCs

and accessories, consumer PCs and accessories, handheld computing devices, digital "connected"

entertainment, media smart servers, and DVD+RW drives.

Under HP’s enterprise business, they also provide world-renowned technical services,

information management software, business intelligence solutions, communications and media

software, and enterprise/ networking storage services. To leverage their venture into enterprise

business services and to augment their software offerings for business customers, HP followed a

deliberate strategy that included the purchase of 12 independent software companies

(www.hp.com).


Finally, HP has a large investment in IT research and development, which delivers new

technologies and creates business opportunities that go beyond their current product strategies.

This effort includes a web-based forum on early-state innovations to encourage open feedback

from consumers and the development community.

Hewlett-Packard Management and Leadership

Like most publicly owned corporations, Hewlett-Packard is managed by a Chief

Executive Officer (CEO) and several lower executive-level officers. Following are the executive

leaders and managers of HP (Annual Report, 2009):

Mark V. Hurd is the Chief Executive Officer and President. He has served as Chairman since September 2006 and as Chief Executive Officer, President, and a member of the Board since April 2005. Peter J. Bocian has served as Executive Vice President and Chief Administrative Officer since December 2008 R. Todd Bradley has served as Executive Vice President of Personal Systems since June 2005. Michael J. Holston has served as Executive Vice President and General Counsel since February 2007 and as Secretary since March 2007. Vyomesh I. Joshi has served as Executive Vice President of Imaging and Printing Group since 2002. Catherine A. Lesjak has served as Executive Vice President and Chief Financial Officer since January 2007. Ann M. Livermore has served as Executive Vice President of Enterprise Business since May 2004. John N. McMullen has served as Senior Vice President and Treasurer since March 2007. Randall D. Mott has served as Executive Vice President and Chief Information Officer since July 2005. James T. Murrin has served as Senior Vice President, Controller and Principal Accounting Officer since March 2007.


Marcela Perez de Alonso has served as Executive Vice President, Human Resources since January 2004. Shane V. Robison has served as Executive Vice President and Chief Strategy and Technology Officer since May 2002.

Hewlett-Packard Mission, Goals, and Objectives

Hewlett-Packard's Mission Statement is very broad and comprehensive. Following is an

excerpt from their mission statement:

We are a leading global provider of products, technologies, software, solutions and services to

individual consumers, small- and medium-sized businesses, and large enterprises, including

customers in the government, health and education sector (Annual Report, 2009).

HP's mission and corporate objectives remain the same as they were when first written by

co-founders Bill Hewlett and Dave Packard in 1957 (Annual Report, 2009). As such, they have

successfully guided the company for over 50 years. Whether or not their corporate objectives are

well written can be debated, but one thing remains certain; they have successfully held up to the

test of time. Following are seven corporate objectives from HP’s mission statement (Annual

Report, 2009):

Customer loyalty. To provide products, services and solutions of the highest quality and

deliver more value to our customers that earns their respect and loyalty.

Profit. To achieve sufficient profit to finance our company growth, create value for our

shareholders and provide the resources we need to achieve our other corporate objectives.


Market leadership. To grow by continually providing useful and significant products,

services and solutions to markets we already serve - and to expand into new areas that build on

our technologies, competencies and customer interests.

Growth. To view change in the market as an opportunity to grow; to use our profits and

our ability to develop and produce innovative products, services and solutions that satisfy

emerging customer needs.

Employee commitment. To help HP employees share in the company's success that they

make possible; to provide people with employment opportunities based on performance; to

create with them a safe, exciting and inclusive work environment that values their diversity and

recognizes individual contributions; and to help them gain a sense of satisfaction and

accomplishment from their work.

Leadership capability. To develop leaders at every level who are accountable for

achieving business results and exemplifying our values.

Global citizenship. Good citizenship is good business. We live up to our responsibility to

society by being an economic, intellectual and social asset to each country and community in

which we do business.

Hewlett-Packard Vision

HP’s vision statement is somewhat vague as far as their future market position. It seems

to be more of a broad-stroke statement of their commitment towards, and the potential corporate

benefits of, a diversified workforce. It focuses on diversity, leadership, and their global quest.

Following is HP’s vision statement:


We believe diversity is a key driver of our success. Putting all our differences to work across the

world is a continuous journey fueled by personal leadership from everyone in our company. Our

aspiration is that the behaviors and actions that support diversity and inclusion will come from

the conviction of every HP employee - making diversity and inclusion a conscious part of how we

run our business throughout the world (www.hp.com).

Hewlett-Packard Cultural Business Values

Bill Hewlett and Dave Packard established a management style and corporate culture

they referred to as the "The HP Way." According to Hewlett, the HP Way "...includes a deep

respect for the individual, a dedication to affordable quality and reliability, a commitment to

community responsibility, and a view that the company exists to make technical contributions for

the advancement and welfare of humanity." (as cited by en.wikipedia.org, n.d.)

HP’s value statements (The HP Way) are very short and to the point, making them easily

understood and communicated. Six of HP’s value statements include (en.wikipedia.org):

Our shared values. The way we get things done Passion for customers. We put our customers first in everything we do.

Achievement and contribution. We strive for excellence in all we do; each person's contribution is key to our success.

Results through teamwork. We effectively collaborate, always looking for more efficient ways to serve our customers.

Speed and agility. We are resourceful, adaptable and achieve results faster than our competitors.

Meaningful innovation. We are the technology company that invents the useful and the significant.


Hewlett-Packard Cultural Business Ethics

HP has earned a long respected reputation for conducting business in a fair and honest

manner. They have established high ethical standards of conduct, and they’ve done an

outstanding job of living up to those standards in their business activities. Dave Packard’s

following statement says it best:

“At HP we want to be a company that is known for its leadership in corporate ethics and

responsibility. A company where employees are proud to work, and customers, partners and

suppliers want to do business with.” (www.hp.com, n.d.)

The ethics values Bill Hewlett and Dave Packard brought to the company over 70 years

ago are still engrained into HP’s corporate culture. Following are HP’s ethics statement and two

of the traits they have strived to sustain (www.hp.com):

Our ethical standards and shared values form the cornerstone of our culture of uncompromising

integrity. Our culture of integrity and accountability, and our performance culture go hand-in-

hand. We win, both as individuals and as a company, by doing the right thing.

Trust and respect for individuals - We work together to create a culture of inclusion

built on trust, respect and dignity for all.

Uncompromising integrity - We are open, honest and direct in our dealings.

Hewlett-Packard Industry Competition

The IT industry is intensely competitive, while also subject to rapid ongoing

technological advancements and price reductions. As such, HP experiences stiff industry


competition in all their business activities. HP has met this competition head on, and is a

powerful contender because of their ability to successfully compete on several fronts; including

technology, performance, price, quality, reliability, brand reputation, distribution, range of

products and services, ease of use, and product support (Annual Report, 2009). Every IT market

segment consists of multiple major corporations with long-established market positions, as well

as rapidly growing newcomer firms. Because most IT products and technology have very short

life cycles, to successfully compete, HP must constantly innovate, develop, and introduce new

and enhanced products. Another continuing trend in the IT industry is declining consumer

prices, even as technological capabilities are enhanced. This means that, to remain competitive,

HP must continuously find ways to reduce the value chain costs of their suppliers and

distributors. But HP has distinctive competitive advantages when it comes to global reach,

research and development capabilities, and intellectual property.

Hewlett-Packard Competitive Strategies

HP has a wide ranging and well established competitive strategy that focuses on

competitive positioning within the industry, operational efficiency, growth investments, and

leveraging the scale and scope of their product lines. These strategies have proven quite

successful. Following are HP’s four strategy objectives (Annual Report, 2009):

Competitive Positioning – We are positioning our businesses to take advantage of

important trends in the markets for our products and services. We are aligning our printing

business to capitalize on key market trends such as the shift from analog to digital printing and

the growth in printable content by developing innovative products for consumers such as the first

web-connected home printer. We are also positioning our enterprise business to capitalize on

the trend towards converged infrastructure products that integrate storage, networking, servers


and management software. In addition, we have developed IT management software offerings

that seek to satisfy the increasing demand for virtualization management and increased

automation.

Driving Operational Efficiency – We have implemented an ongoing program to optimize

efficiency and reduce cost across the company. As part of those efforts, we are continuing to

execute on our multi-year program to consolidate real estate locations worldwide to fewer core

sites in order to reduce our IT spending.

Investing for Growth – We are investing some of the savings derived from our efficiency

initiatives for growth. For example, we are increasing our sales coverage to expand the size of

the market that we cover, including expanding into emerging markets such as China, India and

Brazil. We are creating innovative new products and developing new channels to connect with

our customers, particularly in our PC business. In addition, we are expanding our portfolio of

products and services that we can offer to our customers, both through acquisitions and through

organic growth.

Leveraging our Portfolio and Scale – We now offer one of the IT industry’s broadest

portfolios of products and services, and we are working to leverage that portfolio as a strategic

advantage. For example, in our enterprise business, we are able to provide servers, storage and

networking packaged with services that can be delivered to customers in the manner of their

choosing, be it in-house, outsourced or as a service via the Internet. Our portfolio of

management software completes the package by allowing our customers to manage their IT

operations in an efficient and cost-effective manner. In addition, we are working to optimize our

supply chain by eliminating complexity, reducing fixed costs, and leveraging our scale to ensure

the availability of components at favorable prices even during shortages. We are also expanding


our use of industry standard components in our enterprise products to further leverage our

scale.

Hewlett-Packard Growth and Market Position; Sales and Assets

Sales. HP has long retained its leading global position in the inkjet, laser, and multi-

function printers market. In 2006, HP posted higher revenues than IBM, their number one rival,

making them the overall top dog in the IT industry. They have sustained this lead as the world’s

largest IT seller since that time. In 2007, HP’s revenue increased to $104 billion, making them

the first-ever IT company to report revenues in excess of $100 billion (en.wikipedia.org). In

2009, HP’s revenues exceeded IBM’s by over $21 billion. At this time, their number one rival is

Acer, and their market share gap is 6.3%. Their long-time rival, Dell, fell back to third place. In

addition to their sustained successes in the PC and printer markets, HP has also advanced to

become the world’s 6th largest software company (en.wikipedia.org).

Assets. HP is obviously a rapidly growing corporation. Much of this growth has been

obtained through successful acquisitions and mergers. For example, its merger with Compaq in

2002 and its acquisition of EDS in 2008 led to combined revenues of 118.4 B in 2008. HP

received the Fortune 500 ranking of #9 in 2009 (en.wikipedia.org). Also in 2009, HP announced

the acquisition of 3 Com. This initiative will diversify HP into the lucrative enterprise

networking market.

Hewlett-Packard Social Responsibility

HP has always displayed a strong commitment to social responsibility. Unlike many

corporations who say the right things, but fail to follow through with actions, HP has a very good

track record of making a difference for the communities in which they operate and live.


HP announced in 2007 that they met their 4-year target to recycle 1 billion pounds of

electronics, toner, and ink cartridges. Since then, they set a new goal of recycling an additional 2

billion pounds of hardware by the end of 2010 (en.wikipedia.org). These efforts to protect the

environmental from the waste of their products go well beyond that of most their industry

competitors.

During 2009, Newsweek ranked HP #1 in their Green Rankings of America's 500 largest

corporations. This recognition resulted primarily from HP’s greenhouse gas emission reduction

programs (en.wikipedia.org). HP was an industry first to report greenhouse gas emissions

associated with their supply chain. In 2010, HP was awarded the #1 position of Corporate

Responsibility Magazines’ 100 Best Corporate Citizens.

HP’s commitment to social responsibility is even included as a focus area in their mission

statement:

Global citizenship - Good citizenship is good business. We live up to our

responsibility to society by being an economic, intellectual and social asset to each country and

community in which we do business (Annual Report, 2009).

MARKET OUTLOOK

Introduction to the Stock Market

The stock market can be described as an organized buying and selling (or trading) of

company stocks. Some of the most common stock markets include the New York Stock

Exchange (NYSE), the American Stock Exchange (AMEX), and the NASDAQ.


The stock markets are regulated by the United States Securities and Exchange

Commission (SEC). Their mission is to protect investors, maintain fair, orderly and efficient

markets, and facilitate capital formation (www.sec.gov).

The U.S. investment markets began in 1790 when the federal government issued $80

million in bonds to repay the Revolutionary War debt. Two years later, twenty-four brokers and

merchants signed the “Buttonwood Agreement,” agreeing to trade securities on a commission

basis and laying the basis for securities trading in New York City (www.nyse.com). In 1817,

New York brokers formed the New York Stock & Exchange Board (NYS&EB). The name was

shorted to New York Stock Exchange (NYSE) in 1863. In 2006, the NYSE merged with

Archipelago to form the NYSE Group, Inc., trading publicly on March 8. In 2007, the NYSE

Group merged with Euronext, and was renamed NYSE Euronext. Euronext is a combination of

the Paris Bourse, Brussels Exchange, Amsterdam Exchange, Lisbon Exchange, London

International Financial Futures, and Options Exchange. NYSE Euronext became the first ever

global financial marketplace group.

The American Stock Exchange (AMEX) grew from what began as the New York Curb

Market (and later, in 1929, the New York Curb Exchange). The name curb was because traders

would often conduct business in the streets. They were known as “curbstone brokers.” These

independent traders often invested in smaller up and coming companies that provided new

investment opportunities. In 1929, the New York Curb Market changed their name to the

American Stock Exchange. The AMEX joined the NYSE Euronext in 2008.

The NASDAQ market (once an acronym for National Association of Securities Dealers

Automated Quotations) is made up of technology, retail, communications, financial services,

transportation, media, and biotechnology companies. It is the largest U.S. electronic stock


market. Unlike the NYSE and the AMEX, the NASDAQ does not have a trading floor. Instead,

NASDAQ’s presence is shown using the NASDAQ Market Site in New York’s Times Square.

The tower has a large outdoor electronic display, which provides current financial information 24

hours a day. The NASDAQ historically has maintained greater stability in times of market stress

(www.nasdaq.com).

The level of successes (and failures) of the stock markets are measured by various stock

market indices. Along with the NASDAQ Composite, two of the most referred to and used are

the Dow Jones Industrial Average (DJIA) and the Standard & Poors (S&P) 500. The Dow Jones

is comprised of a price-weighted average of 30 pre-defined stocks. These stocks are from large,

publicly traded U.S. companies. Although widely recognized as an indicator of market

performance, the Dow has often been criticized as not an accurate representation of the overall

performance because it uses a very small number of stocks.

The S&P 500, on the other hand, is a market-value weighted average of 500 stocks from

large US companies which are traded on the NYSE or the NASDAQ. Because the S&P factors

many more companies, it is often referred to as the preferred index, providing a truer indication

of the stock markets.


Figure 1: Anatomy of a Trade


Market periods are frequently referred to bull or bear. The bull-bear line is a reference to

the 250-day moving average line, which provides a reference point for mid and long term

investors. If the index is below the line and there is a decrease in movement, the market is

considered a bear market. If the index is above the line and the movement is generally upward, it

is considered to be a bull market. However, again, the level of the market and the period the

market is in is purely one’s own perception.

Historical Performance

As detailed in the below figure, history shows that the market typically moves in cycles.

In the past 113 years, there have been four bull markets (shown in green) and four bear markets

(shown in red). Investment strategies that work in bull markets may not be effective in flat or

bear markets (www.fulfillment.cfgweb.com).

Figure 2: Dow Jones Historical Trends


The following charts show the progress of the Dow Jones Industrial Average, S&P 500

Index, and the NASDAQ Composite over the years. As you can see, the trend has been a

continuous upward slope with the exception of a few periods, such as the recent recession we

faced in the early 2000’s (the September 11, 2001 terrorist attacks and aftermath, the recent bank

failures, and the drop in housing prices) (stockcharts.com). If you overlay the Dow Jones

Industrial Average and the S&P 500 Index historical data, you will see that the charts almost lay

on top of one another thereby showing the relative similarities in the markets (online.wsj.com).

Figure 3: Dow Jones Industrial Average 1900-Present Monthly


Figure 4: S&P 500 Index 1960-Present Weekly

Figure 5: Dow Jones Industrial Average 1960-Present Monthly


Figure 6: NASDAQ Composite 1978- Present Weekly

Future Outlook

The future outlook of the market is always a cloudy crystal ball. If one could easily

predict the future of the market, there would be little risk in investing. It is always easier to look

in the past and jump on the bandwagon pretending to have been able to foresee the future as

many economical analysts have done.

There is still a great deal of people who buy securities in the market based on current and

past performance. In the New York Times Article, “Buy American. I Am.”, dated 16 October

2008, Warren E. Buffett (CEO of Berkshire Hathaway) stated, “A simple rule dictates my

buying: Be fearful when others are greedy, and be greedy when others are fearful”

(www.nytimes.com, n.d.). Investors should not be too wary of the down turns of the market in

the past as much as they should realize that they are simply getting a bargain on securities at this

time (they are on sale!).


Buffett also wrote, in the same article, that “Cash is trash”. "Today people who hold cash

equivalents feel comfortable," he writes. "They shouldn't. They have opted for a terrible long-

term asset, one that pays virtually nothing and is certain to depreciate in value." This is where

the Time Value of Money principles apply. Money is never worth the same tomorrow as it is

today. Money cannot gain anything simply sitting in an envelope on a shelf or in a safe.

Buffett goes on to say that equities will almost certainly outperform cash over the next

decade, probably by a substantial degree. Some investors think it’s wise to hold on to their cash

until they can effectively time their move back into the market at a later date. This strategy,

Buffett points out, ignores Wayne Gretzky’s advice, who once said, “I skate to where the puck is

going to be, not to where it has been.”

Consumers were able to use their homes to get extra spending cash; using them as a sort

of ATM machine by getting home equity loans or second mortgages. However, with the

collapse of the housing market, and home prices falling, many of these individuals have not only

lost equity, but now have one or two additional home loans.

Because the market is affected by multiple factors, both at home and abroad, it is often

unclear how and when any minor or major event may trigger a large ripple effect. Often, even a

simple rumor may change the direction of the markets.

That said, the future of the market should not matter too much for the long term investor.

Based on historical trends, every dip in the market is followed by a growth. One just needs to be

wary of the growth, for it too will soon fall again.


Although the market has been slowly gaining ground, the Federal Reserve does not

anticipate raising interest rates any time soon. They anticipate leaving the rates as they are for

“an extended period” (online.wsj.com). Hopefully, the Fed’s actions to leave rates at these

historically low levers will encourage spending.

One final trend that should be noted is that NASDAQ has maintained greater stability in

times of market stress. When markets are unstable, specialist firms reduce their risk by widening

spreads, participating less, or halting the stock altogether. NASDAQ's spreads remain tight and,

as a result, volume shifts to NASDAQ and other electronic markets (www.nasdaq.com).

INDUSTRY OUTLOOK

Nature of the Industry

The North American Industry Classification System (NAICS) classifies HP in the

‘Computer & Peripheral Manufacturing in the US’ industry, with a code of 33411. This is

comparable to the Standard Industrial Classifications (SIC) ‘Computer Peripheral Equipment

(3577) and the Standard & Poor’s ‘Computer Hardware’ sub-industry. The companies in this

industry manufacture and assemble personal computers, workstations, laptops, computer servers,

and computer storage devices, with some variations among the companies.

Per the IBIS World Industry Report, technology innovations characterize this industry.

Selling prices, economic activity (disposable household income), product advancements, specific

national/global events (e.g. Y2K), and substitute products drive the industry demand.

Additionally, many companies in this industry manufacture their products outside the U.S.;

either directly or by others (2010). Thus, changes in the applicable nations’ wage structures and

economy can have a significant impact to companies in this industry.


Type of Composition

Forty-three percent of the industry’s 2010 revenues are expected to come from the top

several companies; with HP, IBM, and Dell being the top-three industry leaders. “Industry

concentration has (resulted from) increased industry mergers (e.g. Seagate acquiring Maxtor) and

market share gains by major players. However, products and markets (within the industry) have

broadened” (IBIS 2010). This broadening is with such products as netbooks.

Figure 7: Products and Services Segmentation (IBIS)

Product/Services Share Electronic computers 63.1%

Other computer peripherals 24.1%

Computer storage devices 12.5%

Computer terminals 0.3%

Though HP, IBM, and Dell are the top-three industry peers, their market comparisons

couldn’t be more diverse. HP is in the middle of the stock value range, with a price of $53.42 (at

the time of this report, Dell was priced at $17.00 and IBM was priced at $129.26). In addition,

IBM appears to be the low-risk and high revenue leader of this peer group, with a 0.81 beta and

14% of the industry’s revenue. Dell is a riskier company with a 1.3 beta and an industry revenue

percentage of 2.7%. HP holds a comfortable middle position behind IBM, but well ahead of

Dell, with an industry revenue percentage of 6.7% - half of IBM’s, but double Dell’s

Average Industry Growth


In 2009, per the S&P Sub-Industry Summary, the Industry Index rose 74.2%, strongly

surpassing the 24.3% gain in the S&P 1500 index. Year to date through 4/28/10, the Industry

Index rose 6.7% verses 7.7% increase in S&P 1500 (Smith 2010). However, in terms of real

growth for industry revenue, industry gross product, etc., the industry has been in a five year

decline across the board. See Figure 8.

Figure 8: Real Growth (IBIS) 2006 2007 2008 2009 2010 Industry Revenue *0.3 *-8.1 *-6.6 *-9.2 *-1.7 % Industry Gross Product *-0.5 *-9.7 *-7.9 *-12.0 *-2.3 % Number of Establishments *-3.5 *-5.0 *-5.0 *-5.0 *-3.0 % Number of Enterprises *-3.5 *-5.0 *-5.0 *-5.0 *-3.0 % Employment *-8.3 *-7.0 *-7.0 *-9.0 *-3.0 % Exports *1.3 *-6.9 *-2.9 *-8.0 *1.0 % Imports *4.0 *0.7 *-3.3 *-9.5 *0.0 % Total Wages *-12.6 *-7.0 *-7.0 *-9.0 *-1.8 % Domestic Demand *2.8 *-1.5 *-5.5 *-10.0 *-1.5 % Figure 9: Revenue and Revenue Growth Rate (IBIS)


Opportunities and Threats in the Industry

Threats

Competitive Market. Across the industry, strong price competition and rising component

costs are putting heavy pressure on the profit margins. This is driven by the fact that there are

several long established major industry players, including Dell, IBM, Sun Microsystems, HP,

Apple, and others (Global Markets 2009). These low profit margins make investments in

technological advances a fine, but necessary balance for the industry leaders.

Declining Global PC Shipments. As margins in the computer manufacturing industry

shrink, research from Gartner, a research firm, forecasts that global PC shipments will decline by

about 11.9% to 257 million units; the sharpest decline in history. Gartner also states that the

sales in emerging markets will decline. This global reduction in PC sales could further increase

pricing pressures and result in further industry operating margin losses (Global Markets 2009).

Global Economic Slowdown. The ongoing economic crisis has had major effects on all

geographic regions, prominently across Europe and the US. Real U.S. GDP decreased by 2.4

percent in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an

increase of 0.4 percent in 2008 (Gross Domestic Product 2009). Such weak economic conditions

across the industry’s key markets could further pressurize the companies’ revenues and thereby

adversely affect the overall business (Global Markets 2009).

Opportunities

Demand for IT Outsourcing. “There is increased spending on IT outsourcing across the

world” and “This trend is expected to continue” (Global Markets 2009). The industry has been


taking advantage of this opportunity by offsetting low margins from hardware production with

high margins from services. As an example, in August 2008, HP paid $13B for a technology

services provider, Electronic Data Systems. In doing so, HP is positioning the company to take

advantage of the higher profit margins obtained for services. This makes good sense, since HP is

the worldwide leader in PC sales, but as mentioned in threats, this provides low-profit margins.

HP’s Personal Systems Group only accounted for 12% of earnings with 31% of revenue (high

costs), versus services providing 38% of earnings with only 30% of revenues (Stock Report

2010). This picture is the same across the industry; IBM has gone so far as to sell their PC

segment to Levono.

Wireless and Portable Computing. The Computer Hardware Sub-Industry has potential

opportunities in wireless and portable computing, as it appears there is a growing consumer

preference for this, per the S&P Stock Report (2010). In addition, the demand for small, low-

cost “ultra-portable” notebook PCs and internet-based applications are experiencing strong

growth. As such, these are some of the continuing technological advancement opportunities that

industry players should take advantage of.

Future Outlook

The demand for computers and peripherals is expected to grow; however, prices are

expected to fall at a faster rate. As previously stated, competitive downward pressure on average

unit selling prices will negatively impact revenue (IBIS 2010). Overall, “the industry is expected

to contract further in the five years through 2015, at a real average rate of 0.3% annually”. These

low hardware margins are going to further fuel price competition, making infrastructure and

other value chain costs saving of utmost importance. But all is not lost, as the S&P is projecting


the cyclical downturn in PC sales to rebound with a projected growth of 17% in 2010 and 15% in

2011; which is much better than the 3% growth experienced in 2009. However, these increased

sales will be offset by the continuing trend toward lower average selling prices.

One final factor that should not be overlooked in relation to the computer hardware

industry is the fact that demand in this market can be substantially impacted by unpredictable

events, such as the 9/11 Terrorist attack or the “Y2K bug.” Of course, such events can have

positive or negative effects on the industry depending on the nature of the event. Similarly, new

advancements in technology are sometimes unexpected and can result in exponential growth – as

in the case of IPods and e-Readers.

FINANCIAL STATEMENT ANALYSIS

General Discussion of HP Financial Statements

The Financial statement provides information of value to investors, lenders, and

corporate officials. Financial statements include an income statement, a balance sheet, and a

cash flow statement for specific periods of time. This report focuses on annual data. Financial

statements are typically prepared using Generally Accepted Accounting Principles (GAAP),

which are common guidelines used to normalize accounting practices. The following figures

provide an income statement, a balance sheet, and a cash flow statement for HP over the past

five years (2009 – 2005). In addition, some graphic representations of the data located on these

sheets are added to better clarify the given information. And an analysis of this information will

follow.


Figure 10: Income Statement, Hewlett-Packard, (In Millions of Dollars)

Income Statement (Millions of Dollars) 2009 2008 2007 2006 2005 Revenue 114552 118364 104286 91658 86696 Net Sales (Revenue) 114552 118364 104286 91658 86696 Cost of Revenue 87524 89921 78887 69427 66440 Other Expenses 15321 17003 15897 15067 16267 Depreciation/Amortization 1571 967 783 604 622 Total Operating Expense 104416 107891 95567 85098 83329 Operating Income (EBIT) 10136 10473 8719 6560 3367 Interest Income (Expense) , Net Non-Operating -721 0 458 631 176 Net Income Before Taxes (EBT) 9415 10473 9177 7191 3543 Income Taxes 1755 2144 1913 993 1145 Income After Taxes 7660 8329 7264 6198 2398

Figure 11: Statement of Operation, Hewlett-Packard, (In Billions of Dollars)


Figure 12: Balance Sheet, Hewlett-Packard, (In Millions of Dollars)

Balance Sheet (Millions of Dollars) 2009 2008 2007 2006 2005 Cash and Short Term Investments 13334 10246 11445 16422 13929 Total Receivables, Net 25301 25439 21582 18555 17364 Total Inventory 6128 7879 8033 7750 6877 Other Current Assets 7776 8164 6342 5537 5164 Total Current Assets 52539 51728 47402 48264 43334 Property/Plant/Equipment, Total - Gross 20944 18885 16411 15024 13880 Accumulated Depreciation, Total -9682 -8047 -8613 -8161 -7429 Property/Plant/Equipment, Total - Net 11262 10838 7798 6863 6451 Goodwill, Net 33109 32335 21773 16853 16441 Note Receivable - Long Term 3303 2722 2778 2340 2246 Intangibles, Net 6600 7962 4079 3352 3589 Other Long Term Assets, Total 7986 7746 4869 4309 5256 Total Other Assets 62260 61603 41297 33717 33983 Total Assets 114799 113331 88699 81981 77317 Accounts Payable 14809 14138 11787 12102 10223 Accrued Expenses 16528 18511 14441 12435 11188 Notes Payable/Short Term Debt 707 7502 2511 624 649 Current Port. of LT Debt/Capital Leases 1143 2674 675 2081 1182 Other Current Liabilities, Total 9816 10114 9846 8608 8218 Total Current Liabilities 43003 52939 39260 35850 31460 Long Term Debt 13980 7676 4997 2490 3392 Deferred Income Tax 4230 3162 397 Other Liabilities, Total 13069 10612 5519 5497 5289 Total Liabilities 74282 74389 50173 43837 40141 Common Stock, Total 24 24 26 27 28 Additional Paid-In Capital 13804 14012 16381 17966 20490 Retained Earnings (Accumulated Deficit) 29936 24971 21560 20729 16679 Other Equity, Total -3247 -65 559 -578 -21 Total Equity 40517 38942 38526 38144 37176 Total Liabilities and Equity 114799 113331 88699 81981 77317


Figure 13: Asset Structure, Hewlett-Packard, (In Billions of Dollars)

Figure 14: Liabilities & Equity Structure, Hewlett-Packard, (In Billions of Dollars)


Figure 15: Cash Flow Statement, Hewlett-Packard, (In Millions of Dollars)

Cash Flow (Millions of Dollars) 2009 2008 2007 2006 2005 Net Income/Starting Line 7660 8329 7264 6198 2398 Depreciation 4773 3356 2705 2353 2344 Deferred Taxes 379 1035 415 693 -162 Non-Cash Items 1632 1086 517 759 1898 Changes in Working Capital -1065 785 -1286 1350 1550 Cash from Operating Activities 13379 14591 9615 11353 8028 Purchase of Fixed Assets -3695 -2990 -3040 -2536 -1995 Acquisition of Business -391 -11248 -6793 -855 -641 Sale of Fixed Assets 495 425 568 556 542 Sale/Maturity of Investment 171 280 425 94 2066 Purchase of Investments -160 -178 -283 -46 -1729 Cash from Investing Activities -3580 -13711 -9123 -2787 -1757 Other Financing Cash Flow 162 293 481 251 0 Total Cash Dividends Paid -766 -796 -846 -894 -926 Issuance (Retirement) of Stock, Net -3303 -7810 -7784 -5241 -2353 Issuance (Retirement) of Debt, Net -2766 6293 2550 -193 -1744 Cash from Financing Activities -6673 -2020 -5599 -6077 -5023 Net Cash – Beginning Balance 10153 11293 16400 13911 12663 Net Cash - Ending Balance 13279 10153 11293 16400 13911 Net Change in Cash 3126 -1140 -5107 2489 1248


Figure 16: Cash Flow Activity, Hewlett-Packard, (In Billions of Dollars)

Figure 17: Cash Flow Analysis, Hewlett-Packard, (In Billions of Dollars)


The income statement, Figure 10, itemizes revenues and expenses for HP over the last

five years. This statement is used by investors and lenders to determining the profit ability of the

company. The income statement also shows earnings per share (EPS), normalizing the

measurement of a firm’s performance and allowing investors to compare diverse companies such

as HP to other similar industry competitors. Figure 11, Statement of Operation, gives a visual

representation of Revenue, Expenditures, Earnings Before Interest and Taxes (EBIT), and Net

Income over the past 5 years. The difference between revenue and expenditures is equal to the

EBIT. The net income is what remains after taxes and interest have been accounted for. In

2009, HP took in 114.6 billion dollars in revenue and claimed only 7.7 billion dollars in net

income, a 6.71% profit margin.

The balance sheet, Figure 12, provides assets, liabilities, and owners' equity (net worth)

for HP over the last five years. The balance sheet is used by investors and lenders to evaluate the

company’s ability to adjust to changing markets and future opportunities. Figure 13, Asset

Structure, gives a visual representation of current and fixed assets over the past five years.

Figure 14, Liability & Equity Structure, gives a visual representation of current and long term

liability, as well as equity, over the past five years. Total assets for 2009 are obtained by

summing the current and fixed assets at a total sum of 114.8 billion dollars. Total liabilities and

equity for 2009 are obtained by summing the total liabilities with the total equity at a total sum of

114.8 billion dollars. Both the total assets and total liabilities plus equity should equal the same

amount.

The cash flow statement, Figure 15, presents cash generated from operating, investing, or

financing activities for HP over the last five years. The cash-flow statement is used by investors


and lenders to determine whether cash will be available to meet debts and payments such as

dividends. Figure 16, Cash Flow Activity, gives a visual representation of the year end (next

year beginning) net cash and the net change in cash from year to year. HP had a total of 3.1

billion dollars cash at the end of 2009. Figure 17, Cash Flow Analysis, gives a visual

representation of the cash from operating, investing, and financing activities for HP over the last

five years. The summation of these three activities provides the net change in cash flow equal to

that of the net change in cash flow from year to year.

Given the complexities of the Income Statements, Balance Sheets, and Cash Flow

Statements, the data provided, while balanced, shows limited detail with only critical values;

many of which were used in the calculation of the required ratios.

Financial Ratios

For the purpose of clarity and understanding, the discussion of financial ratios, to include

HP specific financial ratios, has been incorporated into the Strengths and Weaknesses Analysis

section of this paper, under Financial Ratio to Industry Analysis.

Common Size Statements

Common size ratios will be used to compare HP’s income statements and balance sheets

over a five-year period. By expressing the financial statement items in a common size measure,

standardized values will be provided to better assess any observed trends over time. The income

statement values will be expressed as a percentage of total revenue, whereas the balance sheet

values will be expressed as a percentage of total assets.


Common Size Income Statement Analysis. As shown in Figure 18, HP’s common size

income statement values have remained very constant over the past 3-years, between 2007 and

2009. This is in stark contrast to the year 2005, and to some extent 2006.

Between 2005 and 2007, HP’s Total Operating Expense was reduced by around 4.5%.

This appears to have resulted primarily from Other Expenses, which has continuously dropped

over the past 5-years. In concert with these reductions in operating expenses, HP also

experienced significant increases in Operating Income, Net Income Before Taxes, and Income

After Taxes, between 2005 and 2007 (4.5%, 4.7%, and 4.2% respectively). As such, although

the income statement ratios have remained consistent during the past 3-years, there have been

significant gains over the past 5-years.

Figure 18: Common Size Income Statement, Hewlett-Packard, (In Millions of Dollars)

Income Statement (Millions of Dollars) 2009 2008 2007 2006 2005 Revenue 100 100 100 100 100 Net Sales (Revenue) 100 100 100 100 100 Cost of Revenue 76.4 76.0 75.6 75.7 76.6 Other Expenses 13.4 14.4 15.2 16.4 18.8 Depreciation/Amortization 1.4 0.8 0.8 0.7 0.7 Total Operating Expense 91.2 91.2 91.6 92.8 96.1 Operating Income (EBIT) 8.8 8.8 8.4 7.2 3.9 Interest Income (Expense) , Net Non-Operating -0.6 0.0 0.4 0.7 .2 Net Income Before Taxes (EBT) 8.2 8.8 8.8 7.8 4.1 Income Taxes 1.5 1.8 1.8 1.1 1.3 Income After Taxes 6.7 7.0 7.0 6.8 2.8


Common Size Balance Sheet Analysis. As shown in Figure 19, HP’s common size

balance sheet values indicate negative trends between 2005 and 2008, with positive changes

occurring between 2008 and 2009. Some noteworthy trends are as follows:

Total Current Assets increased 2.9% between 2005 and 2006, but then decreased 13.3%

between 2006 and 2008. These reductions primarily stemmed from reductions in Cash and Short

Term Investments; and to some extent, reductions in Total Inventory. Between 2008 and 2009,

overall Total Current Asset ratios remained virtually unchanged.

Total Other Assets dropped 2.9% between 2005 and 2006, but then increased, by 13.3%,

between 2006 and 2008. These gains primarily resulted from increases in goodwill, intangibles,

and accumulated depreciation, and were likely related to acquisitions and mergers during the

period. Between 2008 and 2009, overall Total Other Asset ratios remained virtually unchanged.

Total Current Liabilities experienced constant upward trends between 2005 and 2008

(6% total), then dropped by 9.2% between 2008 and 2009. These changes in current liabilities

were primarily due to changes in Notes Payable/Short Term Debt; and to some extent, Accrued

Expenses.

Total Liabilities increased 13.7% between 2005 and 2008, then decreased slightly (0.9%)

between 2008 and 2009. The increases observed between 2005 and 2008 appear to have resulted

from increases in Long Term Debt and Deferred Income Tax, as well as Other Liabilities.

Total Equity was inversely proportional to the changes in Total Liabilities between 2005

and 2009; with a 13.7% decrease between 2006 and 2008, and a 0.9% increase between 2008

and 2009. The vast majority of these changes were absorbed by Additional Paid-In Capital.


Figure 19: Common Size Balance Sheet, Hewlett-Packard, (In Millions of Dollars)

Balance Sheet (Millions of Dollars) 2009 2008 2007 2006 2005 Cash and Short Term Investments 11.6 9.0 12.9 20.0 18.0 Total Receivables, Net 22.0 22.4 24.3 22.6 22.5 Total Inventory 5.3 7.0 9.1 9.5 8.9 Other Current Assets 6.8 7.2 7.2 6.8 6.7 Total Current Assets 45.8 45.6 53.4 58.9 56.0 Property/Plant/Equipment, Total - Gross 18.2 16.7 18.5 18.3 18.0 Accumulated Depreciation, Total -8.4 -7.1 -9.7 -10.0 -9.6 Property/Plant/Equipment, Total - Net 9.8 9.6 8.8 8.4 8.3 Goodwill, Net 28.8 28.5 24.5 20.6 21.3 Note Receivable - Long Term 2.9 2.4 3.1 2.9 2.9 Intangibles, Net 5.8 7.0 4.6 4.1 4.6 Other Long Term Assets, Total 7.0 6.8 5.5 5.3 6.8 Total Other Assets 54.2 54.4 46.6 41.1 44.0 Total Assets 100 100 100 100 100 Accounts Payable 12.9 12.5 13.3 14.8 13.2 Accrued Expenses 14.4 16.3 16.3 15.2 14.5 Notes Payable/Short Term Debt 0.6 6.6 2.8 0.8 0.8 Current Port. of LT Debt/Capital Leases 1.0 2.4 0.8 2.5 1.5 Other Current Liabilities, Total 8.6 8.9 11.1 10.5 10.6 Total Current Liabilities 37.5 46.7 44.3 43.7 40.7 Long Term Debt 12.2 6.8 5.6 3.0 4.4 Deferred Income Tax 3.7 2.8 0.4 Other Liabilities, Total 11.4 9.4 6.2 6.7 6.8 Total Liabilities 64.7 65.6 56.6 53.5 51.9 Common Stock, Total 0.0 0.0 0.0 0.0 0.0 Additional Paid-In Capital 12.1 12.4 18.5 21.9 26.5 Retained Earnings (Accumulated Deficit) 26.1 22.0 24.3 25.3 21.6 Other Equity, Total -2.8 -0.0 0.6 -0.7 -0.0 Total Equity 35.3 34.4 43.3 46.5 48.1 Total Liabilities and Equity 100 100 100 100 100


Overall, the common size balance sheet indicates negative trends between 2005 and

2008, with positive changes occurring between 2008 and 2009.

Cash Flow Analysis

Some analysts consider cash flow as perhaps a company’s most important financial

barometer. Figure 15 shows the Cash Flow Statement for HP over the last five years, 2009 -

2005. The Net Income increased steadily from 2005 through 2008, followed by a 0.67 billion

dollar decrease from 2008 to 2009.

Cash from operating activities has gone from an 8 billion, five year low, in 2005 to 13.4

billion in 2009, with 2008 seeing a high of 14.6 billion. The greatest increase in cash from

operating activities was seen from 2007 to 2008. In 2007, smaller deferred taxes and non-cash

items, along with a reduction in working capital, resulted in much lower cash from operating

activities than 2006. This produced a 1.7 billion dollar reduction. Cash from operating activities

more than compensated the following year, with a 5 billion dollar increase.

Investing activities increased steadily from $1.8 billion in 2005 to $13.7 billion in 2008.

Acquisition of other businesses was the main contributor to these increased investment cash

flows. A 3-year low in investment activity was seen in 2009, with $3.6 billion being invested.

This increased overall cash flows by 10.1 billion dollars.

Cash from financing activities was both positive and negative over the past five years.

Retirement of stock was the biggest influence. 2008 saw the biggest issuance of debt at 6.3

billion dollars.


Over the past five years, HP has seen positive and negative cash flow. As seen in figure

16, the largest adjustment occurred from 2006 to 2007 with a reduction of 7.6 billion dollars. A

1.2 billion dollar increase was seen from 2005 to 2006 and a 4.0 billion dollar increase was seen

from 2007 to 2008, yet the overall annual cash flow was negative for that year. The largest

increase in cash flow was seen from 2008 to 2009 with an increase of 4.3 billion dollars. Figure

17 shows the net cash flow analysis in billions of dollars. It can be seen that the combination of

outgoing investment and finance dollars were similar to the operating incoming dollars, the net

cash flow being the delta between the adjacent columns.

In 2007, the largest discrepancy between inflow and outflow of dollars was realized.

Investments took a large increase from 2.8 to 9.1 billion dollars with a 1.8 billion dollar decrease

in operating income. This was a contributing factor to the overall net cash flow reduction of 5.1

billion dollars seen that year.

HP plans to continue investing heavily in business growth opportunities, while increasing

operating income and managing debt.

STRENGTHS AND WEAKNESSES ANALYSIS

Financial Ratio to Industry Analysis

There are many resources available to provide financial ratios for both specific

companies and specific industries. These sources use differing ratios, as there are many to

choose from, and occasional calculation variations for computing these ratios. In addition, the

ratio calculations used are not well defined by the source, so comparison of ratios from different

sources becomes difficult. Similar issues arise when comparing data on specific industries from

differing sources. Because HP is such a large and diversified company, it can be included in


many industries and sub-industries within the computer & peripheral manufacturing industry.

This further compounds the issues associated with collecting data from multiple sources in an

effort to get a complete data set, and can lead to suspect or incomparable ratios.

In an effort to avoid such discrepancies, this report uses raw data from a single source

(www.galenet.galegroup.com, Eden-Webster Library) for a select number of corporations that

make up a significant majority of the computer & peripheral manufacturing industry. Hewlett-

Packard (HPQ), International Business Machines Corp. (IBM), Dell Inc. (DELL), Apple Inc.

(AAPL), and Sun Microsystems (SUNW) provide the data sets for the industry and corporate

analysis. The raw data used in these analyses include five years of Income Statements, Balance

Sheets, and Cash Flow Statements (from 2009 to 2005), and are included as Attachment A.

The ratios presented are from a list of ratios outlined in the text, Financial Management

Theory and Practice, 12th Edition. After much research of multiple sources, Dunn & Bradstreet

(D&B) Key Financial ratios for the computer & peripheral manufacturing industry were selected

as a comparison to validate the computed ratios generated from raw data. The majority of the

computed ratios were well within the range of the D&B provided ratios.

Financial Strength. A company’s financial strength is an assessment of their business

risk. Part of this risk analysis assesses a company’s ability to cover or pay off short term debt.

This can be done by using assets that can be quickly converted to cash. These assets are

considered liquid or current assets. The following ratios are used to asses a companies liquidity

and financial strength.


Current Ratio – [Current Assets / Current Liabilities]

A current ratio is a liquidity ratio that measures a company's ability to pay short-term

obligations. A higher ratio is considered better because it means there are more liquid assets that

could be converted to cover outstanding debt.

Figure 20: Current Ratios

Year 2009 2008 2007 2006 2005 HP 1.22 0.98 1.21 1.35 1.38

Industry 1.56 1.47 1.51 1.43 1.65

Quick Ratio – [(Current Assets – Inventories) / Current Liabilities]

A quick ratio measures a company's ability to meet its short-term obligations with its

most liquid assets. A higher ratio is considered better because it shows a company is not

dependant on inventory to cover short term debt.

Figure 21: Quick Ratios

Year 2009 2008 2007 2006 2005 HP 1.08 0.83 1.00 1.13 1.16

Industry 1.48 1.38 1.42 1.34 1.56

Upon analysis of the financial strength ratios of HP and the industry, both the current and

quick ratios for HP’s have been lower than the industry average which may question its ability to

pay short-term obligations. HP continues to maintain a high level of outstanding receivables that

cause a reduction in their quick ratio. In addition, in 2008, HP acquired Electronic Data Systems

(EDS), another information technology services provider, in a deal worth about $13 billion. This


acquisition was paid for with cash and new debt, which provides a substantial, but manageable,

leveraging of the company's financial position. The only year that HP was not able to maintain a

liquidity ratio grater than 1:1 was 2008. The 2009 ratio increased almost 25% from 2008 and

was more in line with the company’s 5-year average of 1.23. Even in 2008, when the current

ratio was below 1, HP was able to meet all short term debt obligations.

Asset Management. A company’s asset management ratios measure success in

managing assets to generate sales. These ratios can provide insight into a company’s inventory

and credit management. The following ratios are used to asses various aspects of asset

management.

Inventory Turnover – [Sales / Inventory]

A higher Inventory Turnover Ratio is indicative of better performance since this indicates

the firm's inventories are being sold more quickly. However, if the ratio is too high then the firm

may be losing sales to competitors due to inventory shortages, reflecting a company’s ability to

convert inventory into cash.

Figure 22: Inventory Turnover Ratios

Year 2009 2008 2007 2006 2005 HP 18.7 15.0 13.0 11.8 12.6

Industry 44.4 41.6 39.5 45.4 50.4


Days Sales Outstanding (DSO) – [Receivables / (Annual Sales/365)]

The DSO ratio provides an indication of how long it takes to collect accounts receivables,

comparing outstanding receivables to average daily sales. A lower ratio shows less time spent

waiting on outstanding receivables and quicker cash flow turnaround. This has great bearing on

a company’s credit policies.

Figure 23: Days Sales Outstanding Ratios

Year 2009 2008 2007 2006 2005 HP 80.6 78.4 75.5 73.9 73.1

Industry 73.1 71.1 75.8 71.8 65.6

Fixed Asset Turnover – [Sales / Net Fixed Assets]

The fixed asset turnover ratio compares fixed assets to sales generated. A higher fixed-

asset turnover ratio shows that the company is more effective in using their fixed assets to

generate revenues.

Figure 24: Fixed Asset Turnover Ratios

Year 2009 2008 2007 2006 2005 HP 10.2 10.9 13.4 13.4 13.4

Industry 12.6 13.4 13.0 13.2 14.1

Total Asset Turnover – [Sales / Total Assets]

The asset turnover ratio measures a company’s efficiency at using their assets to generate

sales or revenue. A higher number is desirable. This may also assist in indicating a pricing


strategy. Companies with low profit margins tend to have high asset turnover,

whereas companies with high profit margins have low asset turnover.

Figure 25: Total Asset Turnover Ratios

Year 2009 2008 2007 2006 2005 HP 1.00 1.04 1.18 1.12 1.12

Industry 1.07 1.22 1.21 1.25 1.28

Upon analysis of the asset management ratios of HP and the industry, all HP ratios have

been below the industry average, with the exception of fixed asset turnover ratio in 2006 and

2007. The 5-year data shows that HP typically takes between two and three months to collect

outstanding receivables. The HP business model continues to be asset intensive. The net assets

portfolio in 2009 increased 20.8% from those in 2008. This increase resulted from higher levels

of financing originations and is reflected in the asset management ratios.

Debt Management. A company’s debt management is based on how it uses lender’s

money as an opportunity to operate and grow as a corporation. In order to stay solvent or make

greater profits, it’s sometimes more practical to invest borrowed funds rather than tie up other

critical resources. Debt ratio is the proportion of a firm's total assets that are being financed with

borrowed funds. A low debt ratio indicates conservative financing with an opportunity to

borrow in the future at no significant risk.

Debt Ratio – [Total Liabilities / Total Assets]

Debt ratio indicates what proportion of debt a company has relative to its assets. The

measure indicated potential risks the company faces in terms of its debt. A debt ratio greater


than 1 indicates that a company has more debt than assets. A debt ratio of less than 1 indicates

that a company has more assets than debt. Used in conjunction with the current and quick ratios,

the debt ratio can help determine a company's level of risk.

Figure 26: Debt Ratios

Year 2009 2008 2007 2006 2005 HP 0.65 0.66 0.57 0.53 0.52

Industry 0.66 0.69 0.63 0.62 0.58

HP has been near, but slightly lower than the industry average for the last five years. As

seen in 2008 and 2009, HP’s long term debt increased significantly with the purchase of

Electronic Data Systems in 2008 and 3Com Corp in 2009. Total liabilities increased from 50 to

74 billion dollars from 2007 to 2009. Along with these purchases, the assets also increased from

89 to 114 billion dollars from 2007 to 2009. This increase in assets offset the increase in debt,

keeping the debt ratio slightly below the industry average. HP continues to smartly manage debt

and maintain a productive balance between debt and assets.

Profitability. A company’s profitability is a measure used to assess their ability to

generate earnings, as compared to their expenses and relevant costs. Having a higher ratio value

relative to the industry average, or the same ratio from a previous period, indicates that the

company is stable and less risky.

Profit Margin on Sale (Net) – [Net Income / Sales]

A higher profit margin on sale indicates a more profitable company that has better control

over its costs compared to its competitors. But in some cases, lower profit margins represent a


pricing strategy. Some businesses, especially retailers, may be known for their low-cost, high-

volume approach. On occasion, a low net profit margin may represent a price war which is

lowering profits, as was seen in the computer industry during 2000.

Figure 27: Profit Margin Ratios

Year 2009 2008 2007 2006 2005 HP 6.7% 7.0% 7.0% 6.8% 2.8%

Industry 4.6% 8.2% 8.1% 5.1% 5.3%

Basic Earning Power – [Earnings Before Interest and Taxes (EBIT) / Total

Assets]

The basic earning power ratio indicates how effective assets are used to generate

earnings. A higher ratio with respect to the industry average indicates the company is controlling

their operating costs and assets, while increasing profits.

Figure 28: Basic Earnings Ratios

Year 2009 2008 2007 2006 2005 HP 8.8% 9.2% 9.8% 8.0% 4.4%

Industry 7.2% 10.9% 10.6% 8.1% 8.8%

Return on Total Assets (ROA) – [Net Income / Total Assets]

The return on total assets ratio demonstrates how effectively the company is converting

its assets into net income. The higher the ratio, the more profitable the company is, because the

company is earning more money on less investment.


Figure 29: Return on Total Assets Ratios

Year 2009 2008 2007 2006 2005 HP 6.7% 7.3% 8.2% 7.6% 3.1%

Industry 4.1% 8.6% 8.9% 6.5% 7.4%

Return on Common Equity (ROE) – [Net Income / Common Equity]

The return on common equity ratio is useful for comparing the profitability of a

company’s past performance, as well as to that of other firms within the industry. It also

measures a corporation's profitability by showing how much profit a company generates with the

money shareholders have invested. A higher ratio shows increased profit using existing equity.

Figure 30: Return on Common Equity Ratios

Year 2009 2008 2007 2006 2005 HP 18.9% 21.4% 18.9% 16.2% 6.5%

Industry 12.4% 40.2% 32.6% 22.8% 26.6%

Upon analysis of the profitability ratios of HP and the industry, HP was lagging behind

the industry until 2009 when it outperformed the industry by all indicators. In addition, HP’s

profit jumped 14 percent in the first quarter of 2010; indicating that their cost-cutting efforts,

started in 2009, and their push into rival IBM Corp.'s stronghold of technology services is

helping the company absorb the declining sales in most of their major divisions. Deep cost cuts

have accompanied a recent shift in HP's strategy. HP eliminated 19,000 of the 24,600 jobs

expected as part of the EDS acquisition. These cuts have helped increase earnings by reducing

operating costs. As a yardstick for the health of overall technology spending, HP's latest

numbers reinforce the trends of stronger consumer demand for items such as the new NetBooks.


Market Value (Valuation or Risk). A company’s market value ratios relate an

observable market value, the stock price, to book values obtained from the firm's financial

statements. These ratios allow a company to evaluate the perceived performance of investors.

These ratios also provide investors a good risk analysis of the company’s current and future

standings in the industry.

Price/Earnings (P/E) – [Price per Share / Earnings per Share]

A high price to earnings ratio suggests that investors are expecting higher

earnings growth in the future. The higher the P/E ratio, the more the market is willing to pay for

each dollar of annual earnings. Companies with high P/E ratios may be considered "risky"

investments as compared to those with a lower P/E ratio. A high P/E ratio signifies high

expectations, thus higher risk.

Figure 31: Price/Earnings Ratios

Year 2009 2008 2007 2006 2005 HP 12.1 14.2 16.5 15.0 27.8

Industry 13.5 16.2 20.0 20.6 24.9

Price/Cash Flow – [Price per Share / Cash Flow per Share]

The price to cash flow ratio compares the stock's market price to the amount of cash flow

generated on a per-share basis. Some analysts consider cash flow as perhaps a company’s most

important financial barometer, and the ratio of stock price to operating cash flow is favored by

many analysts over the price-earnings ratio as a measure of a company’s value.


Figure 32: Price/Cashflow Ratios

Year 2009 2008 2007 2006 2005 HP 7.5 10.1 12.0 10.9 14.1

Industry 9.7 12.9 16.1 16.7 18.3

Market/Book (M/B) – [Market Price per Share / Book Value per Share]

The market to book value per share expresses the total net assets of a business on a per

share basis. This allows companies and investors to compare book values of a business to the

stock price and gauge differences in valuations. If the ratio is above 1 then the stock is

undervalued; if it is less than 1, the stock is overvalued.

Figure 33: Market/Book Ratios

Year 2009 2008 2007 2006 2005 HP 2.3 3.0 3.1 2.4 1.8

Industry 4.2 7.1 8.0 6.7 9.2

Upon analysis of the market vale ratios of HP and the industry, it can be seen that ratios

for HP have decreased from 2008 to 2009. The decreases seen in 2009 are less than seen in the

industry, thus making HP’s outlook better than many of the industry competitors. Much of this

drop is attributed to the decline in PC sales. With a consumer move towards smaller, lower cost

net books, HP has focused on cost reductions, increased technology services, and wireless

products in an effort to stay competitive within the industry.


Financial Strengths and Weaknesses (SWOT) Analysis

HP is an industry leader in developing and manufacturing computer, storage, and

networking hardware; designing and developing software applications; and providing IT related

support and services. The company’s recent acquisitions and expansion plans could present

opportunities to increase revenue. But this does not come without significant risk. Competition

in the market, declining PC sales, and recently acquired debt increases could negatively impact

the company’s operational and financial performance.

Figure 34: SWOT Analysis

Strengths Weaknesses

Operational Performance Market position Strong Presence

Resources

Litigations Limited Liquidity

Opportunities Threats

Acquisitions/Expansions IT Outsourcing

Competitive Market Declining PC Market

Strengths

Operational Performance

During 2009, HP recorded total revenues of 114.5 billion dollars, a slight decrease from

2008, but an overall increase of 32% since 2005. The operating profit of the company was

10,136 billion dollars, an increase of 300% since 2005. The net profit of the company was 7660

billion dollars, an increase of 319% over 2005. HP’s strong performance resulted from increased

revenue across all business divisions. Further, the company's profit margin was 6.7% during


2009 was above the industry average of 4.6%. This higher than average profit margin could

indicate efficient cost management or it could be the result of strong pricing strategies. HP

experienced their largest profit margin increase (4.0%) from 2005 to 2006. This may have been

due to several cost cutting measures taken starting in 2004. This indicates management's focus

on improving profitability. The company’s growth was fuelled by the growth of information

technology in start up markets around the world. Additionally, the acquisition of other

information technology businesses expanded HP’s operational performance and growth.

Market Position

HP occupies a strong position within the computer & peripheral manufacturing industry.

It is a world leader in the sales of personal computers. It occupies a 19.3% share of the global

PC market. It is also a global leader in imaging and printing systems, and leads the market in

UNIX based servers. HP has the third largest share of the storage market in the Americas and

the second largest share in Europe and the Middle East (www.techtarget.com). HP’s strong

market position enhances its reputation and attracts new investors.

Strong Presence

HP is a global company with a presence in more than 170 countries across the world

(en.wikipedia.org). The company’s products are sold throughout the world through a

combination of retailers; internet partners, distributors and direct sales. Global diversity reduces

the risks associated with adverse economic and political developments in any specific region. In

addition, it increases the company’s growth opportunities. HP’s broad product portfolio also

enables it to have an expansive presence across many of the industries market segments.


Resources

HP’s return on equity (ROE) was 18.9% during 2009. This was above the industry

average of 12.4%. A higher ROE ratio indicates that the company is efficiently using the

shareholders' money and that it is generating high returns for its shareholders compared to other

companies in the sector.

Weaknesses

Litigations

HP has been involved in various litigations which could hinder its overall brand name in

the eyes of investors and customers. HP is currently under investigation by the US Securities

and Exchange Commission for leaking board-level information to public in 2006. Additionally,

such issues forced several of its board members to resign, which could hamper its overall

industry goodwill. In 2006, several CNET reporters filed suit against HP over a pretexting

scandal. In 2005, HP settled all ongoing patent litigation with Intergraph Corporation, and the

companies entered into a patent cross-license agreement. The agreement resolved all legal

claims between the two companies. Again in 2007, HP and Acer settled patent litigation. HP

also acquired litigations against EDS when it purchased the company in 2008. EDS, now HP

Enterprise Services, is a defendant in a lawsuit in the United Kingdom filed by Sky Subscribers

Services Ltd and British Sky Broadcasting in 2004. Such litigations and continuous leaking of

information by broad members hampers the company’s overall image.

Limited Liquidity

HP’s current ratio was 1.22 at the end of 2009 and as low as 0.98 in 2008. This remains

below the industry average of 1.56 and 1.47 respectively. A lower than average current ratio


indicates that the company could be in a weaker financial position than other companies in the

industry.

Opportunities

Acquisitions/Expansions

HP expects to benefit from its acquisitions and expansion plans. In 2008, HP made

several corporate acquisitions and expansions. The largest acquisition was Electronic Data

Systems, at a cost of 13 billion dollars. This acquisition made HP the second largest producer of

large-scale corporate data systems. HP also acquired Colubris Networks Inc., a global provider

of intelligent wireless networks for enterprises and service providers. In October 2008, HP

announced intentions to expand operations in Chongqing (China) for the manufacture of

notebook and desktop PCs for Chinese customers. The company continues to add new products

to its portfolio, including high-end digital printers and notebooks with "Touchsmart" technology.

HP believes these acquisitions and expansion activities will accelerate growth.

IT Outsourcing

Many companies continue to outsource IT services, and this trend is expected to grow.

IT outsourcing is forecasted to rise over 300 billion dollars in 2010. This global increase is being

experienced in many developing markets in India, China, Europe, and North America. HP has

positioned itself as an industry leader in IT outsourcing across the world. With HP’s presence in

more than 170 countries, they are well positioned to gain a large piece of the outsourcing market.


Threats

Competitive Market

HP faces stiff competition in all of its industry markets; competing with other well

established corporations such as Dell, IBM, Apple, and Sun Microsystems to name a few. In

addition, it faces competition from a large number of new start-up, rapidly growing firms. In the

enterprise storage and servers industry, HP faces competition from major competitors in both

standard and UNIX-based servers. Competitors in PC production and sales include Dell, Acer

Inc, Apple Inc., Lenovo Group Limited, and Toshiba. The major competitors in Imaging and

Printing include Canon USA Inc, Lexmark International Inc, Xerox Corp, Seiko Epson Corp,

Samsung Electronics Co, and Dell. The ever present competition in these markets could

adversely affect HP’s market share and business position. The current global economic

slowdown has also shown to be a major factor in product consumption.

Declining PC Market

HP is the second largest producer of PCs in the world, with a market share of 19.3%.

They generate about one-third of their revenues from the sale of PCs, but only 10% of sales.

However, PC sales have declined steadily over the last several years. PC prices (margins) have

also been dropping in order to compete with the popular NetBooks and mobile technologies.

VALUE-BASED FINANCIAL ANALYSIS AND RECOMMENDATIONS

Strategy for Increasing the Company’s Value

In conclusion, this paper provides some recommendations for HP to increase the value of

their corporation. Following are three recommendations for HP’s consideration:


Strategic Partnerships. HP recognizes the importance of strategic partnering to take

advantage of partner’s strengths. In the case of Compaq and Electronic Data Systems, HP bought

them outright in order to take advantage of their service structures. HP may consider the

potential benefits of partnering with Amazon, Sony, and Barnes & Noble as a hardware parts

supplier to all of the major electronic readers. Profit margins are low in the hardware industry,

except for probably in this area. An additional way to address the low product margins is to

partner with Apple as a hardware supplier for their continual new lines of iPod, iPhone, iPad, etc.

– as Apple sells their hardware at a premium price.

Services. Continuing to focus on services in the foreseeable future, as HP is doing is

recommended as there does not appear to be any significant changes in the fundamentals for the

IT services market.

R&D. Invest in research and development (R&D). HP would do well to create the next

iPod, the next Kindle, the next XYZ. A new innovative way to approach R&D investment is to

tap the invention market by purchasing a portfolio of patents. Recently in Harvard Business

Review an article identified a new multibillion dollar patent firm that sells packages of patents.

These packages include 1000’s of patents, some ready to turn into a product and enter quickly

into the market; other patents are more risky and may not pay off. However, the firm tries to

ensure that a company purchasing a portfolio of patents can reasonable create products along a

certain idea and will not end of blind-sided by patent litigation or end up in a hand-tied situation

due to missing a critical patent to complete a product as new products are introduced to market.


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