HP’s Modus Operandi, and What’s Dandy About Tandy

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Hewlett-Packard (HWP)

Jim: In our search for excellent stocks, Mike, we start today with Hewlett-Packard, the electronics powerhouse whose deft management was one of the shining examples in the book “In Search of Excellence.”

Mike: In fact, this is the company that started Silicon Valley.

Jim: Really?

Mike: Bill Hewlett and David Packard were engineering graduates in 1939 when their Stanford University mentor told them they should go into business. They started by making oscilloscopes in a garage behind Packard’s rented house in Palo Alto. And there was born a company whose annual sales are now $50 billion, and the whole phenomenon we now call Silicon Valley.

Jim: That’s a company also known for constantly changing in order to sustain its growth.

Mike: True. HP owns the very rare ability to remake itself over and over, and it happens that Hewlett-Packard is once again in that phase right now. So the question arises: Can HP do it again successfully?

Jim: I’ll answer that in a moment. First, we should note that for much of its life, Hewlett-Packard made those electronic test-and-measurement devices, and it still does. But these days it’s mainly a producer of high-tech devices such as personal computers, printers and servers, which are powerful network-oriented computers.

Mike: It’s also engaged in a lot of fundamental research in technology. HP Labs is another of the crowning glories of Silicon Valley.

Jim: But for all that, HP has been a troubled company in the last couple of years. It’s struggled with flattish sales and profit growth, brought on by fierce competition and price cutting in its various product lines. Its operating costs have been too high, and the Asian crisis didn’t help matters. So HP’s stock has been penalized.

Mike: Everything you say is true.

Jim: HP’s stock is up about 44% over the last three years, but that pales next to the near-doubling of the Standard & Poor’s 500 index and comes nowhere near the soaring stock prices of Dell Computer and Compaq Computer. And after last Friday’s meltdown of tech stocks, HP is now trading in the mid-60s, or just 19 times its expected earnings for its fiscal year ending this October. That tells me investors don’t expect a whole lot from this company despite its reputation. I agree with them.

Mike: Well, if they don’t buy now, they’ll be missing a great opportunity, in my view.

Jim: You’re wrong, but you’ve got the ball. Let’s see you run with it.

Mike: Look, these guys are engineers. When they see a problem, they sit down in their shirt sleeves, sharpen their pencils and look for a way to fix it. It’s true that periodically HP gets so good at some business that it grows complacent--that’s what’s happened lately, especially with their PC business. But they’ll fix that, and before you know it, they’ll be in another cycle in which they’re pounding the competition.

Jim: But how long do I have to wait? And isn’t HP’s jumble of product lines a problem? This company isn’t sending out a clear message to investors as to its vision. It’s easy to size up Dell, for instance. It’s just a PC giant that executes like no other. But HP is all over the board, with no clear direction. So I’d pass on the stock until that changes.

Mike: Jim, if this were just any company, I might agree the wheels are coming off. That’s not the case here. I have confidence that HP is a company that will come up with a solution and execute it well. And it’ll do so soon enough for investors to see some real gains in this stock over the next 12 to 18 months.

Jim: HP’s problem is that instead of in search of excellence, it’s now searching for a game plan, and that’s turning off Wall Street.

Mike: Jim, you know as well as anyone that sometimes the Street really doesn’t know what it’s looking for, and, frankly, I don’t care what the Street thinks. Hewlett-Packard has a great history that includes its not resting on its laurels for very long. After all, this company has created more industries than some Silicon Valley toddlers have stock options.

Jim: So it sounds like our argument is one of timing again.

Mike: Fair enough.

Jim: I don’t doubt that HP has the wherewithal to become a big growth machine again. The talent is there. I just think it won’t find the solution until another year goes by--during which you can find more profitable stocks.

Mike: But with the stock at these levels, why not get in when you’ve got a high-tech growth company selling for 19 times earnings?

Tandy (TAN)

Jim: This is the company that owns the 7,000-store Radio Shack chain, which was long known as the place one went for such electronic gizmos as cable wires, TV antennas and stereo headphones. And as such, it was a chain going nowhere, wouldn’t you agree?

Mike: No dissent here.

Jim: I also wondered how Tandy Chairman John Roach kept his job as long as he has, because he hasn’t exactly been the shareholders’ champion. In 1996, right before Tandy’s stock started moving higher, its shares traded in the same range as in 1987!

Mike: That’s because Radio Shack looked as if it was finally going under. It was getting hit from all sides, such as in consumer electronics, where it was getting pounded by the likes of Best Buy and Circuit City. And yet Radio Shack still boasts of a remarkable statistic: About 94% of all Americans already live or work within five minutes of a Radio Shack store.

Jim: That you find the statistic remarkable, and that more people don’t know about it, is actually part of the problem.

Mike: I suppose I shouldn’t be surprised, because it seems that I live and work within five minutes of about 12 of these places.

Jim: Point is, this chain has tremendous name recognition. And one thing Roach did right was hire a fellow named Leonard Roberts in 1993 to run Radio Shack, because Roberts is finally exploiting the chain’s ubiquity. Which is also why Roberts is now chief executive of Tandy.

Mike: Roberts is a guy who made his reputation at places like Arby’s.

Jim: In the restaurant business.

Mike: That’s right. But look at some of the big initiatives Roberts has taken.

Jim: We’re listening.

Mike: For too long, if you bought a major piece of electronic equipment from Radio Shack, you had one choice: the Radio Shack house brand, which was pretty much of C-3 quality. Radio Shack also offered its own brand of computers. They were OK, but for the most part were indifferent, middle-market performers.

Jim: Roberts changed all that.

Mike: Yep. Radio Shack now has a deal with Compaq whereby it has a “store within the store” that peddles Compaq’s machines.

Jim: Same with Sprint in digital phones and other wireless communications gear. And supposedly it’s about to sign up some big consumer brand in the audiovisual electronics game too.

Mike: Roberts has been doing something else that’s very smart: He’s positioning Radio Shack as the place to get all of your household electronics systems installed and maintained. We’re talking about satellite or cable TV, wireless phones . . .

Jim: . . . the Internet.

Mike: Exactly. The idea is for your local Radio Shack store to send a truck over with a technician to set everything up. I think that’s going to be a great business. I’m a techno-savvy guy, but I’d have no idea what to do--or even what questions to ask--if I was going to install, say, a satellite-TV dish on my roof.

Jim: And the fee Tandy will collect for that service isn’t the end of the story.

Mike: No. In another brilliant move, Roberts has arranged things so that if you walk into Radio Shack and sign up for, say, cell-phone service in your area, Radio Shack not only gets a sales commission but also a share of your monthly service bill.

Jim: Talk about a franchise.

Mike: Roberts has said something to the effect that the arrangement is the closest thing there is to free money, and he’s right.

Jim: All of this has started to pay off in Tandy’s stock. Now trading in the mid-50s, or about 21 times Tandy’s estimated ’99 earnings per share, the stock has doubled over the past two years--but only after a zigzag ride.

Mike: No matter. I’d buy it.

Jim: So would I. Roberts has proved he’s a sharp, innovative manager who can unlock Radio Shack’s advantages. And he’s not done. I still worry that Radio Shack’s reputation as a place for techno-nerds is a turnoff to the masses, but I’m convinced Roberts will eventually change that.

Mike: I look at that potential, and I think: There’s your upside.

Jim: Meantime, Tandy is posting monthly sales gains in the high single digits, which is good; and its operating earnings are growing at a double-digit pace, as shown by its fourth-quarter results announced last week. Plus, the stock’s price is appealing.

Mike: This is a company that as recently as two or three years ago you might have thought would disappear off the face of the Earth. But now it’s stronger than ever, and Tandy is a great stock to buy.

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Write or e-mail with a stock you would like to see discussed in this column. James Peltz ([email protected]) covers the markets and corporate financial trends. Michael Hiltzik ([email protected]) covers technology and entertainment and is the author of a new book, “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Era.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

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Hewlett-Packard, Monday: $65.88

Tandy, Monday: $57.25