Risk Analysis of Hewlett Packard
Risk Management: An Overview
Risk management started out as an indemnity management purpose. The cost of indemnity had restricted management's alternatives in dealing with the hazards faced by the organization. One of the foremost problems was that insurers rated firms according to business in such a way that a fine run firm that had few losses were required to pay for the claims of poorly run firms within the same industry. With this, the role of risk management appeared. Management began to make out that abridged losses intended reduced cost of risk. If risk managers reduced losses they could hold them themselves without resorting to indemnity. However, it took some time for industries to settle in risk management.
The delicate inquisitiveness in risk management is the result of a number of instantaneous drifts. Globalization of trade and production has augmented financial and direct investment in unstable up-and-coming markets. Risk management has also ensnared consideration as a result of the recurring and well-publicized breakdowns linked with its execution. Regardless of the amplified academic and specialized concentration paid to risk management, common instances still occur when classy investors or firms experience abrupt, unexpected, and devastating losses.
To an economist, risk is described as the survival of ambiguity about potential upshots. Risk is a mean reason in economic existence for the reason that individuals and firms create immutable reserves in research and product improvement, inventory, plant and equipment and human capital, without knowing whether the potential cash flows from these funds will be adequate to pay off both debt and equity holders. If such genuine investments do not engender their necessary returns, then the financial claims on these returns will turn down in worth.
In addition to altering the extent of equity and debt in their capital composition, firms/business organizations can also influence their chance of liquidation by extenuating the risk disclosures they countenance. Firms/Business organizations come out to prefer between the types and degrees of disclosures, assuming those that they consider have an aggressive gain in supervision and laying others off into the capital markets ( 1996). Other features of the firm's processes such as the convexity of its tax lists, can also influence the amount to which administrators challenge to alleviate risks (1996). Apparently, , (1996) believes that economists and strategic planners view risk management as being related to the issue of the boundaries of the firm. In this structure, the pronouncement to alleviate meticulous risks is comparable to the verdict to outsource a particular purpose. Thus, risk management, like technology, allocation, or level, is a basis of economical plus. As part of risk management, this paper aim to analyze risk in Hewlett-Packard Co.
The Company: Hewlett-Packard
Headquarters for Hewlett Packard Company are in Palo Alto, California. The Company is a global provider of computing and imaging solutions and services for business and home. Its focus is on taking advantage opportunities arising due to the Internet and the proliferation of electronic services. The number-two company worldwide has operations in the United States, Europe, Asia, and the Pacific Rim, Africa, Latin America, Canada and the Middle East. The company is decentralized and prides itself on giving its 104 divisions decision-making authority. The number of employees around the globe totals about 123,500. Six hundred sales and support offices and distributor ships, resellers and retailers handle distribution for the company’s products. The majority of revenues come from computers plus peripherals and services. Fifty-four percent of HP’s business is derived outside the United States, and two thirds of that comes from Europe. The company also lunches the Agilent Technologies as an independent corporation, which includes test and measurement, semiconductor products, chemical analysis, and health solution businesses. The company also restructured itself as an Internet specialist to stimulate growth. It provides Web hardware, software, and support to customers. Basically, the future outlook is positive, and the company plans to remain a major player in the computer industry.
From this preview, this paper attempts to evaluate the risk management of Hewlett Packard. Actually, risk management is a task similar to the other management functions such as marketing, purchasing or finance. Thus, if we look at economic development from a functional viewpoint risk management is somewhat every countries do which directs to the realisation of its overall economic objectives.
Risk and Return: Analysis for the Firm
Estimating Historical Risk Parameters (Top-Down Betas)
Stock Price History
Beta:
1.62
52-Week Change3:
23.09%
S&P500 52-Week Change3:
12.56%
52-Week High (12-Jan-07)3:
43.72
52-Week Low (08-Jun-06)3:
29.00
50-Day Moving Average3:
40.20
200-Day Moving Average3:
40.36
From the company Hewlett Packard, the regression of the individual stocks monthly prices against the S&P 500 index as of April 18 was conducted. The results of the regression on which we strenuous were the intercept (to calculate the Jensen’s alpha), the slope (beta/risk), the R-squared (to understand how much of the risk is diversifiable) and the standard error of the Beta (to assess the validity of the top down prediction). The results are presented in the following table.
a) Intercept: The intercepts of the regressions for the data gathered from Hewlett-Packard and S&P 500 are shown in coefficients table (i.e. 1330.821). Since the value is positive, then we may say that the stock performed better than expected by the market.
Our Jensen’s alpha figure (12.56%) indicates that in S&P 500, the companies’ stocks performed better than expected during the period of the regression. This reveals that the Hewlett-Packard is in positive track and the market underrates the returns on these stocks.
b) Slope: The slope of the regressions gave us the beta of Hewlett-Packard. The figures reveal that the Hewlett-Packard analyzed are below average risk (Beta = 0.873). This is most probably due to steady earnings and low debt ratios of the company.
c) R2: The R2 indicates that the greatest part of the risk faced by Hewlett-Packard comes from specific sources. This is somehow surprising as the fortunes of the company depend on factors such as prices and general macroeconomics trends. It is also arguable however that the company’s operations involve high levels of risk of catastrophes (which is intrinsic to each firm’s safety policies). The computed R2 is 0.762.
d) Standard Error: Since the standard errors of the betas are adequate, then it also allow us to consider these figures reliable.
Comparing to Sector Betas (Bottom-Up Betas)
To understand the importance and role that financial leverage we calculated the value of the company’s unlevered betas. For the calculation we used the market value of debt and equity in order to come up with the D/E ratio to apply in the formula:
Unlevered Beta = Levered Beta/[1+(1-marginal tax rate) x D/E]
The marginal tax rate of 40% was used. The values are:
Hewlett-Packard
Unlevered Beta
1.66
Market value D/E
0.152
Beta
1.81
As shown in the table, there is significant difference between the unlevered beta and levered beta of Hewlett-Packard. The difference between the unlevered and the levered betas shows that debt does not play an important role. Actually, the Hewlett-Packard risks are due to business-related factors and only a smaller portion to financial leverage.
Choosing Between Betas
Although the betas resulting from the regression are on average good estimates, because of the low standard errors we also calculated the betas using the bottom-up method. Most companies in S&P 500 are not solely involved in the exploration and production of computers, and marketing.
HPQ
Industry
Market Cap:
110.30B
438.98M
Employees:
156,000
5.50K
Qtrly Rev Growth (yoy):
10.70%
9.90%
Revenue (ttm):
94.08B
450.80M
Gross Margin (ttm):
24.51%
32.85%
EBITDA (ttm):
10.16B
38.71M
Oper Margins (ttm):
7.62%
3.34%
Net Income (ttm):
6.52B
11.47M
EPS (ttm):
2.306
0.4
P/E (ttm):
17.87
33.57
PEG (5 yr expected):
1.23
1.41
P/S (ttm):
1.17
1.53
As shown in the comparison estimates, the industry is much higher than HP. The production of computers and other operations represent a growing part of the overall businesses of these companies. The presentation below shows the direct comparison of HP to the overall industry with respect to their Betas.
Estimating Earnings and Cash Flows
Typical Investment
Hewlett Packard is the world's leading producer of test and measurement instruments and one of the world's largest computer company. It has become a major player in the personal computer market, and at the time of our research was the sixth biggest in terms of market share, having moved up from fourteenth largest in 1992. It is also the second largest player in the computer workstations market, and holds the dominant position in the laser printer business. The company was the only major computer manufacturer which remained profitable during the recession. Underpinning the Hewlett Packard culture is the HP Way, developed by founders Bill Hewlett and Dave Packard, which emphasizes clearly stated and agreed overall objectives but gives people the freedom to work towards these goals in ways they determine best for their own areas of responsibility. Other pillars of the HP Way include an emphasis on selecting individuals on the basis of their creativity and their enthusiasm, and the need for cooperation between organizational levels. A sophisticated performance management process and clear organizational values, together with a single status culture, has brought strong identification with the company on the part of employees. The organization has traditionally had a decentralized structure, but with the growth of the computer business, a more centralized approach was taken to reflect the systems nature of the business.
Earnings and Cash Flows
From the website the following table presents the earnings and cash flows of Hewlett-Packard from April 2006 to January 2007.
PERIOD ENDING
31-Jan-07
31-Oct-06
31-Jul-06
30-Apr-06
Net Income
1,547,000
1,697,000
1,375,000
1,899,000
Operating Activities, Cash Flows Provided By or Used In
Depreciation
643,000
596,000
598,000
596,000
Adjustments To Net Income
335,000
587,000
171,000
314,000
Changes In Accounts Receivables
548,000
(1,246,000)
226,000
(1,055,000)
Changes In Liabilities
(909,000)
563,000
657,000
861,000
Changes In Inventories
(698,000)
(381,000)
(732,000)
(85,000)
Changes In Other Operating Activities
(1,488,000)
1,428,000
334,000
1,104,000
Total Cash Flow From Operating Activities
(22,000)
3,244,000
2,629,000
3,634,000
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures
(718,000)
(965,000)
(623,000)
(521,000)
Investments
79,000
19,000
11,000
10,000
Other Cashflows from Investing Activities
(4,325,000)
65,000
171,000
13,000
Total Cash Flows From Investing Activities
(4,964,000)
(881,000)
(441,000)
(498,000)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid
(218,000)
(219,000)
(222,000)
(226,000)
Sale Purchase of Stock
(1,515,000)
(194,000)
(1,758,000)
(813,000)
Net Borrowings
276,000
(67,000)
149,000
(57,000)
Other Cash Flows from Financing Activities
100,000
(1,464,000)
1,592,000
58,000
Total Cash Flows From Financing Activities
(1,357,000)
(1,944,000)
(239,000)
(1,038,000)
Effect Of Exchange Rate Changes
-
-
-
-
Change In Cash and Cash Equivalents
($6,343,000)
$419,000
$1,949,000
$2,098,000
From this table, the Hewlett-Packard works on a scale so awesome and has an influence so vast that it is often difficult to see. The level and diversity of technologies that it must deploy are increasing, which imposes both new investment burdens and new uncertainties and risks. Roughly a million new computer products are built around the world each week – they are easily the most complex products of their kind to be mass-produced in such volumes. The industry uses manufacturing technology that is the cutting edge of science. But still, the potential for developing coordination skills, intellectual capabilities and emotional sensitivities through electronic technologies remain far from fully exploited. There are numerous additional near-term technological opportunities to adapt the computer to changing market competitions. The possibilities suggest that Hewlett-Packard technology is unexpectedly robust and provides a powerful defense against the growing competition in the market.
Analyzing Existing Investments
From the discussion, Hewlett-Packard Co. is subject to numerous technical directives and regulations, as well as legislation of a more legal nature. The legislation covers areas such as competition law, intellectual property law, consumer protection and taxation. When the computer industry reached full development, accelerated technological efforts were made to create a web of local suppliers that would make it possible to meet the growing legal requirements for the national integration of production.
Other than the computer themselves, the business is intricately tied to the manufacture of a wide range of components and the extraction of precious raw materials. Indirectly, it brings cyber crimes, too many crimes in the cyber world and possibility to wave of other environmental troubles. The effect to the Hewlett-Packard Co. are that they needed to establish R&D centers to take advantage of research infrastructure and human capital, so that they can develop computer products both locally and international to satisfy the requirements of the cyber world, environmental and safety regulations more effectively.
Evaluating Sustainability of Competitive Strengths
HP has several core competencies which they could utilize to further gain advantage over their competitors, and if possible, overtake IBM in its market leadership in the computer industry. One core competency of the company is their brand management. The strength of their computer marketing has been such that their brand is known even in the parts of the world where computers are not the common medium of communication and advancement in technology. Another core competency is their supply chain management, which links to their ability to maintain a steady stream of computer products. Their highly coordinated logistics system handled by outsourced firms also form part of their core competencies, leading to excellent inventory management and always on schedule production activities. Another marked advantage is their ability at the moving assembly line. Being the pioneer of such mass production system, they were able to get ahead of the competitors manufacturing processes-wise and were also able to save on costs and time. Yet another advantage is HP’s focusing on its product development technology under a single product-information-management program through standardizing and incorporating them. If sustainable development is to achieve its potential, it must be integrated into the planning and measurement systems of business enterprises. And for that to happen, the concept must be articulated in terms that are familiar to business leaders. Many observers believe that more stakeholders -- investors, consumers, nongovernmental organizations and others -- will insist that companies to take environmental and social costs as seriously as they take purely financial costs. In addition, investors are expected to increasingly seek out sustainable companies and avoid firms with poor environmental performance, judging the sustainable companies as better risks over the long term. Likewise, consumers are expected to search for products that perform well environmentally. In addition, the e-marketing procedures employed by HP Co. will possibly boost their advantage in international market since they have the capabilities to innovate computer products.
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