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HP Is 'Epitome of a Value Trap': Ritholtz

Wednesday, 21 Nov 2012 | 2:23 PM ET

Hewlett-Packard shares tumbled 12 percent to a 10-year low Tuesday after the company announced a shocking $8.8 billion write-down and dismal quarterly results.

In 2011, HP acquired Autonomy for $11 billion in a bid to move deeper into software and services. HP now says it was duped, citing "serious accounting improprieties" in announcing the write-down, of which more than $5 billion was related to accounting issues and the rest due to the division's poor performance.

HP's founder Michael Lynch vehemently (and publicly) disputed HP's claim of wrongdoing, leading many observers to wonder whether HP was really the victim of accounting fraud (a word the company notably hasn't used) or is just using these alleged accounting issues as an excuse to mask poor performance.

"The mind boggles as to where the snafu was," says Barry Ritholtz, CEO of Fusion IQ and author of The Big Picture blog, who notes the accounting industry is once again left with another black eye — and with shareholders holding the bag. "I'm not just talking about HP," he says. "This is a mainstream part of finance and quite frankly an embarrassing debacle."

Beyond questions over the potential failings of audit firms Deloitte UK and KPMG, HP's board and its finance team, Ritholtz says, "To me, this is just another bad HP acquisition. They were once a wonderful, storied company. Now they need to figure out who they are."

For shareholders, this is the critical question because the Autonomy write-down and drama over the allegations served to somewhat obscure another lousy quarter for HP overall.

For its fiscal fourth quarter, HP reported poor performance across the board as revenues fell in its PC, printer, services, and server and networking divisions. HP reported a 7 percent drop in revenue vs. a year ago and a whopping loss of $6.9 billion.

For the full fiscal year ended Oct. 31, HP's overall revenues dropped 5 percent while earnings dropped 23 percent.

Tuesday's swoon comes on the heels of another big drop in October when the company cut its fiscal 2013 guidance and CEO Meg Whitman talked about a long, slow turnaround process.

After the earlier decline, many analysts declared HP to be "cheap."

At around $12, The Wall Street Journal notes HP now trades at 6 times its enterprise value, which includes factors such as debt. But that compares with 9.7 times for Apple, which is growing much faster and has a rock-solid balance sheet.

"HP is the epitome of a value trap," says Ritholtz, who has no position (long or short) in the stock. "The stock has been in a relentless downtrend for a decade, has a history of making horrific acquisitions and is in a space that's pretty much been devastated by tablets in general and Apple specifically."

Looking forward, the best chance for the company is to transform itself into an "IBM-like services company," he continues. "But I don't know if they have ability, or the skills or the management team to do that."

Considering both the deals for Autonomy and EDS — for which the company took a separate $8 billion write-down this year — were designed to do just that, it's a fair question and skepticism is warranted.

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.

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