Profit-Takers Pounce on H-P

"It sounds like they intended to build inventories, but they probably built them too much," says Bill Gorman, vice president of equity research at PNC Advisors, which owns H-P shares. While the company will have to work hard to trim down this inventory over the coming months, Gorman says he isn't concerned about the potential of any write-downs.

H-P's declining gross margins also look ominous. But given the phenomenal performance in H-P's PC group -- the company's least profitable business -- many analysts and investors were willing to chalk up the falling gross margins to a mix issue.

H-P's overall sales comprised a greater portion of less-profitable PCs during the fiscal first quarter, but that dynamic paid off: In the October-December period, H-P beat out Dell(DELL) for the title of the world's No.1 PC maker for the second quarter in a row, according to industry research firms.

Of course, now that Michael Dell has retaken the CEO post at Dell, the days of H-P's easy share gains may be coming to an end. And Eastman Kodak's(EK) recent decision to enter the inkjet printer market will mean more competition and pressure on margins in H-P's lucrative inkjet supplies business.

Kodak is slated to begin selling inkjet printer cartridges for half the price of what's currently on store shelves during the current quarter. That's the time when H-P's printer supplies business typically kicks in, as consumers refill the ink cartridges for the printers they received as holiday gifts.

The new band of competitors lining up against H-P, not the first quarter's inventory situation, could prove to have the biggest impact on the company's future prospects.

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