H-P Humming Along

Revenue in H-P's PC group rose 10% year over year in the second quarter, thanks to strong double-digit sales growth in notebooks and consumer PCs. Hurd said that H-P had gained 1.4% of PC market share worldwide and 2% in the U.S. during the quarter.

"The market growth continues to be led by a shift to mobility, strength in emerging markets and consumer," Hurd told analysts in a conference call following the earnings release Tuesday.

Printer supplies were another big revenue engine in the fiscal second quarter, increasing 10% year over year, following on the first quarter's impressive 11% growth.

Less stellar was the 3% growth in printer hardware units during the second quarter. And the servers-and-storage division managed to log only a 2% revenue growth in the quarter, despite the fact that H-P's use of Advanced Micro Devices Opteron processors provides it with a big advantage over Dell, whose servers use Intel chips exclusively.

Hurd said he was not satisfied with this performance and that H-P was beefing up its sales force to accelerate revenue growth.

What level of overall sales growth the company is ultimately capable of generating is still an open question.

Eventually, "HP's ability to continue to increase its margins could become increasingly challenging," wrote Needham and Co. analyst Charlie Wolf in a note to investors. "When that occurs, possibly by 2007, mid-single digit revenue growth will not be sufficient to propel the stock higher." Needham does not have any business relationships with H-P.

According to Wolf, who rates H-P hold, a 7.5% revenue-growth rate (which is above the 4% to 6% growth rate that H-P has set for 2007) and 8.5% operating margin produces a fair price of $26 for H-P's stock.

But with profit climbing 50% as it did last quarter, most investors have plenty of good news to focus on.

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