Margins Still Mastering H-P

Hewlett-Packard(HPQ) shares followed the market lower Thursday as investors began to look past the company's short-term earnings triumph and focus on the longer-term struggles -- both internal and external -- that it faces.

Specifically, Wall Street analysts seemed convinced that there was limited upside as long as margin pressures continued and the company remained without a permanent leader following the technology hardware giant's ouster of CEO Carly Fiorina last week.

The stock slipped 21 cents to $20.85 early Thursday after initially moving higher.

In a first-quarter earnings report that otherwise beat analysts' earnings and revenue estimates, H-P said its gross margin slipped to 22.9% vs. 23.3% in the fourth quarter and 24.7% in the same quarter last year. H-P cited margin pressure from pricing and product mix for its enterprise storage and servers, software and services.

"While we continue to make progress in growing our top line, there is work to be done to improve our profitability. As the board conducts a CEO search, our management team is focused on driving improved execution to serve our customers, strengthen our competitiveness and improve shareholder value," said Bob Wayman, the company's chief financial officer who has taken over interim chief executive duties.

But analysts didn't see an immediate end to margin pressure. Chris Whitmore, an analyst at Deutsche Bank, trimmed his fiscal 2006 earnings estimates on the company.

"As H-P becomes more heavily reliant on commoditizing markets like PCs and servers, we believe the company will continue to face margin pressure," he wrote in a Thursday morning research note. "In addition, with Dell(DELL) becoming more competitive in the printer space, we believe a price war is brewing in H-P's 'crown jewel' business."

The company also admitted having near-term pressure on printer margins. In order to spark sales for its important printers and imagers, especially in the consumer segment, H-P expects increased promotions in the near term. Consumer hardware sales dropped 13% from the same quarter last year as digital imaging and scanners fell off.