H-P Investors Turn to EDS Integration

SAN FRANCISCO - Hewlett-Packard's(HPQ Quote - Cramer on HPQ - Stock Picks) strong quarter covered up a couple of unflattering bruises.

Sales of the company's servers, as well as sales in the U.S. in general, both came in weaker than expected -- a rare sign of weakness for the Palo Alto, Calif., tech giant.

But the negatives weren't enough to put a dent in the Street's confidence in H-P.

"Hewlett is a company with a variety of product lines. You put them all together and they still exceeded expectations," says Mike Binger, a fund manager at Thrivent Financial, which owns H-P shares.

H-P's stock was off 2.2%, or $1, to $45.45 in midday trading Wednesday. But the decline seemed more indicative of the continued misgivings about the recently announced $13.9 billion EDS(EDS Quote - Cramer on EDS - Stock Picks) acquisition than on H-P's latest earnings report.

"What investors are going to focus on now is the EDS acquisition," says Thrivent's Binger, particularly how it H-P integrates the technology consulting firm and how it affects H-P's profitability.

H-P CEO Mark Hurd reiterated his vision for the EDS deal during Tuesday's earnings conference call, citing the improved reach it will give H-P into important corporate accounts. He said H-P saw opportunities to "materially" improve the profit margin for its technology outsourcing group once the two businesses were combined.

While investors waits to see how the acquisition proceeds, H-P's 16% increase in net income during its fiscal second quarter kept Wall Street analysts happy and offset the weak spots in the report.

Citigroup analyst Richard Gardner lifted his price target for H-P from $64 to $71. Citigroup has provided investment banking and non-investment banking services to H-P within the past 12 months, and a Citigroup director also serves as a director at H-P.

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