NEW YORK (CNN/Money) -
Hewlett-Packard reported higher sales and earnings for the latest quarter Wednesday that came in well ahead of Wall Street forecasts. But the company, like rival Dell, said that it was still not seeing a big pickup in corporate demand for tech.
Palo Alto, Calif.-based HP posted net income of $862 million, or 28 cents a share, in its fourth quarter ended Oct. 31. Excluding restructuring charges, HP earned $1.4 billion, or 36 cents a share, up from 24 cents a share a year ago. Analysts were expecting earnings excluding one-time items of 35 cents a share, according to First Call.
The world's second-largest maker of personal computers reported sales of $19.9 billion, up 10 percent from $18 billion a year earlier and well ahead of Wall Street's average estimate of $19 billion.
The company reported an operating profit in all of its divisions, fulfilling a promise that CEO Carly Fiorina made in August after HP's personal computer unit and enterprise division, which sells servers and storage to large corporate customers, posted losses.
HP slightly raised its sales guidance for its fiscal first quarter, saying it expects sales to be in a range of $19.1 billion to $19.5 billion. Analysts had been expecting revenue of $19 billion.
The company also reaffirmed that earnings for the quarter, excluding charges, would meet the Wall Street consensus of 35 cents a share and that earnings for next year should also be in line with analysts' estimates of $1.42 a share.
But during a conference call Wednesday, Fiorina said that corporations were still fairly "tight with the purse strings" and that consumer spending on tech is more healthy. "We are not counting on a huge improvement in demand in the enterprise," she said.
Shares of HP (HPQ: Research, Estimates) rose nearly 1.5 percent in after-hours trading, on top of solid gains during regular New York Stock Exchange trading.
Profits in all its divisions
The PC business is notoriously tough, and industry leader Dell announced in its latest earnings report last week that it was seeing intensified price competition. But it appears that demand for desktops and notebook computers was strong enough to overcome falling prices. HP reported sales of $6 billion in its PC division, which also includes sales of handheld computers, and an operating profit of $21 million.
On the enterprise side, sales came in at $4.1 billion, up 10 percent from the third quarter. And the unit posted a $106 million operating profit, driven largely by cost cutting.
"We've made the tough decisions, the portfolio choices and the necessary investments. We enter the new fiscal year with strong momentum. I have never been more confident in HP's competitive position," Fiorina said in a written statement.
HP's largest and most profitable division, its printing and imaging business, continued to demonstrate solid growth, with sales of $6.2 billion, up 19 percent from a year ago and 21 percent from the third quarter. The unit generated an operating profit of $1 billion, a 7 percent increase from the same period last year and up 36 percent sequentially.
The company's services unit reported sales of $3.2 billion, a 5 percent increase from a year ago. Operating profits came in at $393 million. Services is an increasingly important part of HP's overall business since its profit margins are much higher than its hardware businesses. Operating margins for services were 12.2 percent, compared with margins of less than 1 percent in the PC division and 2.6 percent in the enterprise unit.
Quarter should quiet some doubters
HP has been a target of criticism on Wall Street since it announced its merger with Compaq in 2001. That deal closed in May 2002 and this was the first time that all four of HP's major businesses were profitable since then.
"Our results validate the Compaq merger," Fiorina said during the conference call.
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The stronger-than-expected results could be what HP's stock needs to get out of its funk. Despite an improving outlook for the overall economy, HP's shares trade at a sizable discount to its major rivals, at just 15.5 times estimated earnings for calendar 2004.
IBM (IBM: Research, Estimates), which HP competes closely with in both the enterprise and services businesses, trades at 18 times 2004 earnings estimates. Lexmark (LXK: Research, Estimates), the No. 2 printing company, has a P/E of 21. And Dell's (DELL: Research, Estimates) multiple is 28.
HP will probably continue to get a discount to these companies, but some fund managers think HP has more upside because Wall Street has been so negative about the company.
"There have been a lot of skeptics, and that's why HP sells at a discount. But there were very low expectations for everything outside of printing so the risk/reward scenario is favorable," said Daniel Boone, managing partner of Atlanta Capital, which holds HP in the Calvert Social Investment Equity fund.
The good news should silence some of HP's naysayers, but one strong quarter is not likely to completely put an end to the doubts. After all, HP reported a solid second quarter in May, only to disappoint investors with its clunker of a third quarter.
"Consistency is always the challenge at HP," said William Batcheller, senior portfolio manager with National City Investment Management Co, which owns HP in its Armada Large Cap Growth fund.
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