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Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report), a worldwide provider of computing and imaging products and services, has reported earnings of $1.17 a share for the fiscal 2011 first quarter (ended January 31st), well above our estimate of $1.06 and earnings of $0.93 in the year-earlier period. The better-than-expected bottom-line performance was the result of a wider gross margin, aided by a more profitable revenue mix (including the contributions of higher-margined businesses, like networking products) and benign commodity costs. Increases in research, sales coverage, and acquisition-related costs were partly offset by a $0.04-a-share gain on the sale of real estate.

January-period revenues of $32.3 billion, however, were a bit below our estimate of $32.8 billion, the result of declines in personal computer sales to consumers and reduced technology services revenues. Although unit sales of notebook computers rose 4%, revenues generated fell 5%, suggesting prices were under a little pressure. The consumer market in the quarter was soft overall. In fact, the 4% year-to-year top-line increase was mainly supported by continued technology purchases by businesses. In the services segment, the company ramped up its long-term signings, but short-term signings and revenues were below expectations. The weakness in these sectors was offset by strength in enterprise products, like servers, and in imaging and printing product revenues.

The company recently brought out a new tablet computer, the TouchPad, and two new smartphones based on the WebOS operating system acquired through the purchase of mobile device maker Palm in fiscal 2010. The new products may help lift consumer product revenues. It expects the strength in the commercial computing market to continue. In the services area, it plans to sell more higher-margined projects to its installed base customers and has added management personnel in this segment. The company's new chief executive officer, Leo Apotheker, plans to discuss H-P's strategy in more detail in mid-March.

Although Hewlett-Packard's long-term outlook holds promise, the stock traded down sharply after the company provided muted guidance for the rest of fiscal 2011. Indeed, it now looks for April-period sales of $31.4 billion-$31.6 billion and earnings of $0.99-$1.01 a share, compared with our respective forecasts of $32.8 billion and $1.10. For all of fiscal 2011, H-P is targeting revenues of $130.0 billion-$131.5 billion and earnings of $4.46-$4.54 a share. We are reducing our full-year top-line estimate to $130.0 billion, from $133.0 billion, but are maintaining our earnings forecast of $4.45 a share.

Near-term challenges aside, Hewlett-Packard's 3- to 5-year prospects remain favorable. Continued heavy investment in R&D, coupled with a few strategic acquisitions, ought to support new products and better revenue growth beyond the current fiscal year. In addition, the stock's recent weakness provides long-term investors with a good entry point, in our view.

About The Company: Hewlett-Packard provides computing and imaging solutions and services to consumers and businesses. The company operates in six segments: Imaging & Printing (20% of 2010 revenue), Personal Systems, (32%), Enterprise Storage & Servers (15%), Services, (27%), Financing (3%), and Software, (3%). Research and development costs amounted to 2.3% of 2010 revenue.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.