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How hot is HP?
New CEO Hurd has made noticeable improvements, but they may not mean the stock is a buy.
November 16, 2005: 12:58 PM EST
By Amanda Cantrell, CNN/Money staff writer

NEW YORK (CNN/Money) - Can Mark Hurd, now in his eighth month on the job at Hewlett-Packard, continue pleasing Wall Street?

Analysts and investors are hoping that the CEO will continue with the upward trajectory he started since taking the reins of the computer products maker from the ousted Carly Fiorina earlier this year.

Since he took the job, Hurd has slashed costs, cut 14,500 jobs and delivered a better-than-expected fiscal third quarter. Now the HP faithful hope he will produce even more satisfying numbers.

For HP's fourth quarter, its third with Hurd at the helm, the company is expected to report revenue of $22.8 billion and earnings of 46 cents per share. That would translate to 6 percent growth in earnings year over year and 13 percent growth in earnings from the year-earlier quarter, according to estimates from Thomson FirstCall.

The company will also report its forecast for the current quarter, the first of fiscal 2006. Analysts expect HP to forecast revenue of $22.5 billion and earnings per share of 44 cents.

"HP's found their footing in the field," said Dan Renouard, an analyst at Robert W. Baird Co. "HP had a lot of operational issues going back a year or two; they were dropping the ball, and the feedback is that they've stabilized. We're expecting a reasonably good quarter."

Sanford Bernstein analyst Toni Sacconaghi Jr. said he expects HP to report a very strong quarter, largely due to stronger than expected PC and PC server growth, according to a recent research note. He expects HP to report revenues of $22.9 billion and earnings of 49 cents a share.

Still, analysts and investors these days are more concerned with HP's margins than its revenue, and they'll be eager to see how the cost-cutting changes Hurd made are affecting the company's profitability.

Keith Bachman, an analyst at Banc of America Securities, thinks the company's margins are continuing to improve thanks to a reduction in costs and improved efficiencies, according to a recent research note. He adds, however, that margins in HP's printer business, its biggest division, probably felt some impact in the quarter from weakness in the inkjet hardware market.

Renouard said he is expecting HP to post operating margins of about 7 percent, which would be up slightly from the previous quarter but flat year over year.

Escaping Dell's doldrums?

Concerns about weakness in its consumer business in the U.S. and the U.K. led HP rival Dell (down $0.15 to $29.66, Research) to warn about its third quarter revenue and earnings, which came in at $13.9 billion for revenue and 39 cents for earnings per share, excluding a one-time charge of 14 cents per share related to repairs of one of its computer systems as well as costs related to job cuts.

Keith Bachman, an analyst at Banc of America Securities, does not think HP will escape some of the problems that have plagued Dell, in part because HP has almost 40 percent exposure to the consumer market, according to a recent research note. But he added that HP is more geographically diversified than Dell, which nonetheless saw good growth in some regions outside the U.S.

Renouard pointed out that Dell also suffers from higher expectations from Wall Street.

"Because HP has been operationally challenged, there's a lot more room for them to improve," he said. "Dell has been operating at a level of excellence, so when they have shortfalls they don't have operational improvements they can put through" to immediately resolve the issues that caused the shortfall.

Renouard added that HP also benefits from having a more diversified product lineup than Dell.

Analysts and investors will pay close attention to HP's printer business, which is the company's real cash cow. Bernstein's Sacconaghi estimates this division will account for 63 percent of its operating profit in 2005.

HP's rival, Lexmark (down $1.01 to $43.64, Research), which posted a decline in profit and lower-than-expected revenue for its most recent quarter, has raised some concern about HP's printing results for the quarter. But Renouard said he thinks Lexmark's issues were largely specific to the company.

"You wouldn't look at the Lexmark news and say it's a positive for HP, but we think it's mostly company specific," he said. "They've got a fairly heavy exposure to Dell, and Dell is shifting to some other suppliers."

A big run for the stock

Wall Street is still mixed on whether Hurd's changes mean HP is a "buy."

Bernstein's Sacconaghi downgraded HP to "market-perform" from "outperform" this week, saying the stock no longer represents a compelling value.

HP's stock closed Tuesday at $28.12 and has traded in a 52-week range of $19.89 to $29.51.

Robert W. Baird's Renouard has a "neutral" rating on the stock, noting that he thinks it is fairly valued.

"The stock has had a big run," he said. "There's a fair amount of expectation built into HP, and a lot of what's known out there is largely built into the stock."

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Dell's investors less than impressed: Click here.

For more technology news, click here.

Renouard does not own shares of HP, Dell or Lexmark, and his firm does not do banking business with those companies. Bernstein's Sacconaghi does not own shares of HP, nor does his firm have investment banking ties to the company. Banc of America's Bachman does not own shares of HP, but his firm has banking ties to the company.  Top of page

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