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Respect More Than a Quarter Away for H-P

In the wake of a disastrous financial performance earlier this summer , a chastened Hewlett-Packard (HPQ - Get Report) is likely to hand in a respectable report for the quarter ended in October.

But Wall Street, leery of the company's inconsistent earnings record and a dimming growth outlook next year, remains cool to the shares.

The blow-up that took place in August -- when H-P said net income would fall well below expectations for two straight quarters -- deeply rattled investor confidence. The stock has slowly made up losses since then, however, helped along by H-P's buyback of an estimated $2.1 billion of shares during the quarter. Shares closed Monday at $19.42, only a hair below their close on Aug. 11, just before H-P issued its massive earnings warning.

Yet it may be tough for the stock to move much higher, as H-P heads into what many expect to be a slower growth year in 2005.

To be sure, most analysts expect H-P can match the Wall Street outlook for $21.1 billion in revenue with earnings of 37 cents a share for the fourth quarter. But they sound almost universally jaded about H-P's prospects.

"Even with H-P likely hitting its targets [for the October quarter], we have very little conviction in its ability to consistently meet expectations," summed up a skeptical Laura Conigliaro of Goldman Sachs.

Going forward, she doesn't believe H-P will be able to improve profits in the enterprise and PC segments and expects the company to have difficulty maintaining profit margins in its key printer division. The bottom line: "Small relief rallies are more likely than longer term appreciation," she predicted.

(Conigliaro has a neutral rating on the shares; Goldman has done recent banking for H-P).

Merrill Lynch analyst Steve Milunovich likewise sounded a standoffish note. "We expect HP to have a good quarter though we aren't recommending the stock as a buy," he said. "We believe the enterprise business in 2005 will not achieve the consistent improvements required for investors to pay more than the value of the printing business, roughly where the shares trade today."
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