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Dow-30 Earnings: Hewlett-Packard - Fiscal First Quarter 2013
Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report), a computer maker and a component of the Dow 30, surprised investors with a better-than-expected January-quarter earnings report. Despite concerns regarding the company's year-ahead outlook, the stock responded positively to the news and advanced sharply.
H-P's reported earnings of $0.63 a share in the opening period of fiscal 2013 (which began November 1, 2012) fell short of the $0.73 it logged in the year-earlier term, but exceeded management's previous guidance of $0.34-$0.37 and our estimate of $0.34. Earnings also compared favorably with the steep losses recorded in the final two quarters of fiscal 2012, which were the result of writedowns of the company's Autonomy software business and workforce reduction program charges.
Four large services contracts, including one with General Motors, apparently didn't run off in the January period as management had anticipated, but will do so in the April term. Efforts to align expenses with revenues, which declined 6% year to year, also helped mitigate some of the pressure on the bottom line. Reported earnings included $0.19 a share of restructuring, intangibles, and acquisition costs.
The better-than-expected results notwithstanding, H-P's overall performance was weak in the opening quarter of fiscal 2013, which management describes as a "fix and rebuild year''. Revenues in all five of H-P's product groups declined in the January period. Personal Systems, the company's largest product segment, turned in an 8% revenue decline, with notebook computers down 16% year to year and particular softness in consumer revenues (down 13%). Consumer spending for computers remains depressed, and the popularity of mobile phones and tablet computers may be stealing sales from H-P.
The performance of the enterprise products group was mixed, with a 13% decline in storage systems partly offset by a 4% increase in networking products revenues. Printing hardware and supplies revenues fell 5% relative to the fiscal 2012 like quarter, but margins expanded and the company seems to be gaining share in high-end offerings. Enterprise services revenues declined 7%. Software revenues and margins held relatively steady.
Although the company believes its turnaround efforts are beginning to gain some traction, its year-ahead prospects remain difficult, and H-P cautions that its earnings progress won't be linear. Management now expects share net in the April quarter to decline to only $0.38-$0.40, including an estimated $0.42 of acquisitions and restructuring costs. The aforementioned services contracts are expected to run off in the period, and will have a negative effect on the bottom line. In addition, personal systems will face a tough revenue comparison due to difficult market conditions and because revenues in the year-earlier period benefited from a pickup following the resolution of hard disk supply constraints a year earlier. But the benefits of the restructuring program are expected to accelerate over the balance of fiscal 2013 and into fiscal 2014. Moreover, recently launched storage system offerings might help lift enterprise product revenues, but server revenues may be hurt by continued weakness in the European market.
The company looks for full-year fiscal 2013 reported earnings of $2.30-$2.50 a share, including $1.10 of acquisitions and restructuring costs. The latter costs are expected to moderate in the second half from the fairly high April-period level. We still expect the company's recovery to be a very gradual, uneven process. But owing to the better-than-anticipated January-quarter results, we have raised our share-net estimate for fiscal 2013, from $1.95 to $2.10.
In fiscal 2014, we tentatively expect the company to make only slight bottom-line progress, since comparisons with this year's January-period earnings probably will be tough. Our initial fiscal 2014 estimate is for earnings of only $2.30 a share.
Hewlett-Packard stock still has a lot of long-term recovery potential, despite the issue's strength following the stronger-than-expected January-quarter earnings report. But the issue is not suitable for conservative investors, given H-P's still poorly defined earnings trajectory. And long-term investors will need to be patient, since the company's comeback is likely to be a protracted process.
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 2012 revenues), Personal Systems, (29%), Enterprise Storage & Servers (17%), Services, (28%), Financing (3%), and Software, (3%).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.