HP break-up plan is three years too late

SAN FRANCISCO — Three years into her job as CEO of Hewlett Packard, Meg Whitman has finally abandoned her failed attempt to turn around the lumbering Silicon Valley giant.

For shareholders who've been waiting for Whitman to revive growth, the decision to break up HP into two companies is too late by roughly the same number of years. (That is, three.)

By waiting so long to execute the spin-off, HP has given time to its longtime PC rival Dell to re-organize as a private company that can price its products aggressively.

Meanwhile, Chinese hardware giant Lenovo – which bought IBM's PC unit a decade ago – has boosted its share of the PC market.

In 2013, HP's PC shipments in the U.S. fell 9.4%, while Dell's were flat and Lenovo's surged 17.5%, according to market researcher IDC.

And as noted in a column here 20 months ago, HP's business model of selling high-priced PCs, services and other hardware to enterprises is a relic of a bygone era.

In the new tech economy – in which both consumers and businesses are using mobile devices more and more and PCs and printers less and less – HP's product line-up looks woefully outdated.

An analysis of the company's own financial results show that Whitman's tenure can be described accurately as something between a mild and significant disappointment for investors.

For the fiscal year ending this month, HP is expected by Wall Street analysts to report sales of $112 billion.

That's a flat performance compared with the prior year and 12% lower than the company's sales in the fiscal year that ended in October 2011 — just after Whitman took the HP helm in September 2011.

The company's operating income and margins tell a similar tale.

For the most recent quarter ended in July, HP's operating income plunged 21% from a year earlier to $1.46 billion, as its operating margin fell to 5.3% of revenue from 6.8%.

For the full fiscal year ended last October, HP's operating income was $7.1 billion, 26% lower than the $9.7 billion it reported in fiscal 2011.

On the bottom line, HP has done slightly better, thanks to thousands of job cuts and a corporate restructuring Whitman led.

The company is expected to report earnings of $3.73 a share this fiscal year, up from $3.56 a year ago and better than the $3.32 per share in fiscal 2011.

Yet while HP's own margin trends have long argued for a spin-off of the company's PC business, Whitman resisted, stating publicly that her goal was to boost the profitability of the unit before considering such a move.

That hasn't happened.

The operating margin for the company's personal systems unit in the most recent quarter was 4% of revenue.

In the quarter that Whitman took the helm, the figure was 6%.

In other words, investors will now get a piece of a PC company with smaller U.S. market share and lower profit margins than HP had three years ago.

That helps explain why H-P's stock performance during Whitman's tenure has badly trailed the broader bull market.

Since Nov. 21, 2011, the day of Whitman's first earnings call as HP CEO, the company's shares are up 30%.

During that same time, the S&P 500 Index has risen 62%.

That means investors who bought HP shares on optimism for a Whitman-led turnaround could have made twice as much of a return simply by buying an index fund.

Given the company's stagnant sales and sliding margins, long-term investors who've gone bullish on HP's split-up news may see similar relative returns.

John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.