H-P's Optimism Does Not Compute

Updated from 8:31 a.m. EST

Hewlett-Packard(HPQ Quote), in a preliminary release yesterday, reported fourth-quarter earnings and revenue that beat analysts' estimates, and CEO Mark Hurd said the strong results mean H-P is different from its rivals.

Unlike some competitors, the company has a diverse product range and has cut costs deeply, buoying profits. The CEO's sunny outlook probably will lead analysts to raise their estimates. TSC Ratings gives HPQ a "B minus" rating, down from a "B" in August. After yesterday's news, TSC's quantitative rating could actually rise in the months ahead, based on this incremental information. Investors are optimistic -- the company's stock jumped 14.5% yesterday and was up 1.7% in early trading Wednesday.

But H-P's fourth-quarter results are, in a way, a look back in time. Similarly, our rating relies heavily on historical data and, in our view, HP's forecast for 2009 may be too optimistic to swallow. The real question is what will the figures in early 2009 and beyond actually look like.

For the stock market to take a fourth-quarter forecast to be a bullish sentiment shows how fickle investors are and how traders are looking for any news to make a quick buck. Readers, don't be fooled.

Similar to my recent analysis of IBM (IBM Quote), H-P's history in economic downturns has been less than stellar. Its financials and share price are the proof.

Already this year, the stock has tumbled 42%. In the tech bubble, it fell from a dizzying $70 to just $10. Earnings per share fell from $1.87 in 2000 to a loss of $0.36 per share in 2002. H-P is clearly recession-sensitive, and it's only a matter of time before earnings catch up to the grim economic reality.