H-P Bulls Riding Hurd

Although H-P has aggressively moved to cut costs, slashing its headcount by 15,300 employees since July, these savings are not showing up in the financial results yet, say analysts. Rather, the margin gains reflect stronger execution, as the company focuses on pricing discipline, operational efficiencies and management.

Each of H-P's six main business units had year-over-year growth in the company's fourth quarter, to combine for $22.9 billion in revenue, up 7% year over year. Of particular note to investors, the company's PC business managed to move ahead in a quarter when rival Dell(DELL Quote), the world's largest computer maker, has faced difficulties.

While Dell's 2% decline in U.S. consumer sales raised questions about industrywide PC demand, H-P's performance suggested that the environment for PCs was still healthy -- consumer client revenue at H-P was up 14% year over year.

Hurd indicated that there still was much work to be done. But while the company has now proven that it can boost margins by focusing on improving execution and cost-cutting, it has yet to demonstrate how it will grow the top line going forward -- something that's particularly challenging given the company's giant revenue base.

Hurd said H-P was focused on expanding in key areas, but the guidance showed scant evidence of new growth. The company projected revenue growth for fiscal 2006 between 3% and 5%, with adverse foreign currency issues putting pressure on growth rates.

"While operational discipline has translated into a material improvement in its operating margin, it has yet to translate into higher revenue growth," wrote Needham analyst Charles Wolf, maintaining his hold rating on the company.

How much longer investors will continue to be enamored of H-P without seeing significant top-line growth remains to be seen. Perhaps H-P will provide some answers about future growth potential on Dec. 13, when it hosts an analysts' day in New York.

"Revenue is still a major question mark," said Atlantic Trust Stein Roe's Chuck Jones, whose firm holds H-P. "I would be surprised if they're going to be able to grow revenue much beyond a 6% constant currency rate, just because of the size of the company. If they can, that would be really another leg up in the stock."