H-P Backtracks as Wall Street Wises Up

Updated from Aug. 16

There's an important difference between beating expectations and blowing them out of the water.

Investors who piled into Hewlett-Packard (HWP Quote - Cramer on HWP - Stock Picks) in after-hours trading, after H-P reported earnings Wednesday after the close, were learning that Thursday. News that the company had posted fiscal third-quarter operating earnings of 97 cents a share -- 12 cents above the First Call/Thomson Financial consensus -- sent the stock into the ether. H-P, which finished regular trading up 1 7/16 at 111 7/16, was soon flying in after-hours trading above 120 on Instinet and other electronic communications networks.

But what those investors didn't know is exactly how much of those 97 cents were attributable to exceptional events. That story came out during a postearnings conference call marked by a notable absence of the good vibes CEO Carly Fiorina has shown herself very capable of generating in the investment community in her one-year tenure. And after that information reached investors, the stock returned Thursday morning to its Wednesday closing level, and below.

The 97 cents a share already excluded a one-time gain on the sale of stock. But it failed to exclude 4 cents worth of other nonoperating items, including currency-exchange gains. After wrangling with analysts over several questions on how the quarter's numbers were calculated, CFO Robert Wayman conceded that, on an operating basis, H-P's earnings were closer to 93 cents a share. "Yeah," he said, "that's a sensible way to look at it."

Oh, and Don't Forget Tax Rates

The 93-cent-per-share figure was still well above expectations. But that margin would've been slimmer still had analysts been braced by management for a lower-than-expected tax rate, the fruits of globalization. The way SG Cowen Securities analyst Richard Chu figures it, excluding the lower tax rate -- a perverse task over the long term, but, in his view, perfectly reasonable if you're trying to compare H-P's results with actual expectations -- takes out another 4 cents, bringing operating earnings down to 89 cents a share. (Chu rates H-P a strong buy, and SG Cowen has performed no recent underwriting for the company.)

"It wasn't a particularly clean number," said Sanford Bernstein analyst Toni Sacconaghi, who had wrestled with Wayman over the company's use of a year-ago comparison of 71 cents a share, which excludes the cost of stock-appreciation rights and transition expenses associated with the spinoff of Agilent (A Quote - Cramer on A - Stock Picks).

Most analysts were following First Call in using 66 cents as the basis for year-over-year comparisons. On the call, Sacconaghi protested: "My estimates were based on 66 cents. And if I based them on 71 cents, my estimates would have been higher, and everyone else's would have been higher. I'm just questioning Carly's statement that no matter how you measure it, this was a clear outperformance beyond expectations." (Sacconaghi, whose firm has done no underwriting for H-P, rates the stock a market perform.)

But wait. There's more. H-P did manage to make its 15% revenue-growth goal. But it did so only through the statistical magic of rounding. The 15% revenue growth the company reported in the first line of its press release was, in actuality, just a hair above 14.5%. The company also said during the call that caution over its monochrome-printer and desktop-PC businesses would keep it from raising its fourth-quarter growth target above 15%.

Disappointing Unix Sales

Furthermore, Unix server sales were less than impressive. Many on the conference call may have remembered Fiorina's claim earlier this year that Unix server sales would continue to accelerate. And you wouldn't expect that goal to be out of reach, given the incredible momentum Sun Microsystems (SUNW Quote - Cramer on SUNW - Stock Picks) continues to generate in that business, having on Tuesday indicated to analysts that Unix demand was looking greater than the company had initially expected for the current quarter. But at H-P, sales of Unix servers grew just 13%, more than 10 percentage points below some analysts' forecasts, and down from 26% growth in the previous quarter.

"Unix results were disappointing, and revenue growth was slightly below management's explicit guidance," said Kurt King, an analyst at Banc of America Securities. "To be diplomatic, management was a little more rosy in interpreting its results than I was." (King Thursday cut his rating on the stock to buy from strong buy, and his firm has no underwriting relationship with H-P.)

H-P's results, of course, were hardly disastrous. But they certainly weren't the blowout that investors were led to believe by the company's press release and the major newswires. (TSC initially reported on the strong results as well.)

"The real underlying numbers are not quite as good as what's on the surface," says Cowen's Chu. "But once things sort out, after a couple of weeks, the story will be that they're in good shape and on track."

Investors who loaded up on shares of H-P just after 4 p.m. EDT on Wednesday will have to find consolation in that.