Hewlett-Package: The Benefits Of Being Diverse

A chart of the shares of the large diversified tech companies’ stocks- IBM (NYSE: IBM), Hewlett-Packard (NYSE: HPQ), Cisco (NASDAQ: CSCO) and Oracle (NASDAQ: ORCL)– against monoline tech companies Dell (NASDAQ: DELL), VMware (NYSE: VMW), and Intel (NASDAQ: INTC) – shows that the companies with many product lines have sharply outperformed the DJIA over the two years of the recession. The monolines have not. In the debate whether it is better to be in one business or several, several has won among large tech companies.
The HP earnings for the last quarter support the diversification argument powerfully. Its five business lines each made gains for the last quarter which contributed to the 28% improvement in earnings that the company posted. The company’s server business did well, but HP’s software and services revenue each rose. Operating incomes also rose at all division. HP increased its guidance for earnings for the rest of the year.

Cisco announced earning last week. Wall St. did not like the company’s guidance, but, like HP, Cisco’s divisions posted strong results, a sign that the diversity of its operations and its M&A appetite have served investors well. The same is true of Larry Ellison’s efforts at Oracle.

VMware, however, which is in one of the hottest sectors of tech, virtualization, produced only an 18% increase in operating income in the last quarter.  Net income improvement was similarly modest. Dell, which has relied mainly on PC sales despite some diversification, has struggled. It has not been able to offset the drop in its global market share by getting into business which complements its original business.

The diversified tech companies took risks by expanding into business that they may not have understood as well as their original ones. It turns out that the risk was worth it. That is obvious to anyone who looks at the details of the HP earnings.

Douglas A. McIntyre