Leo the repairman

HP: HP Chief Executive Leo Apotheker's first big presentation to shareholders on Monday won’t be pleasant. His predecessor's deal-making and cost-cutting juiced up the computer-maker's profits. Spending more on research and development, boosting quality and gluing HP’s parts together is a necessary task — but won’t generate quick returns.

Apotheker has had it rough since his start in November, when he took over for Mark Hurd, who left amid questions about his personal conduct. Oracle tried to get Apotheker to appear in court over his role in a scandal involving illegally downloaded code at a subsidiary of former employer SAP. Then HP missed first-quarter sales estimates.

Now he has to present a diagnosis and a prescription for fixing HP to shareholders. The good news for Apotheker is that investors aren't expecting much. The stock trades at less than eight times estimated 2011 earnings — that's a 36 per cent discount to IBM and 40 per cent to the broader S&P 500 Index.

HP is the biggest seller of corporate hardware in a world where buyers increasingly call the shots. HP's gross margin, a good indication of its pricing power, has been falling for a decade. That trend may accelerate. Tablets, dominated by Apple, show signs of sapping PC sales. Competition in servers is increasing since Cisco and Oracle entered the market.

Some basic fixes seem in order. Raising its R&D investments — the firm spends less than 3 per cent of sales (compared to 6 percent at IBM) - might be a good way to revitalize HP's technological edge, as would focusing on increasing quality. Better knitting of HP's disparate businesses, including acquisitions Palm and 3PAR, might deliver greater opportunities to cross-sell different products to customers.

And, growing the firm's software business through acquisition, which only accounts for 2 per cent of sales, makes sense if the company can find some reasonably-priced targets. Trying to make Palm's operating system for smartphones and tablets a widespread standard would be a higher-risk task.