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HP on Deck: What Wall Street Is Saying

NEW YORK (TheStreet) -- HP (HPQ - Get Report) reports first-quarter results after market close on Thursday with investors keen to see whether the embattled tech giant can again defy Wall Street's expectations.

Analysts surveyed by Thomson Reuters predicted revenue of $27.19 billion and earnings of 84 cents a share, compared to $28.4 billion and 82 cents a share in the prior year's quarter.

Investors breathed a massive sigh of relief after HP blew past Wall Street's revenue forecast in its fourth-quarter results in November, although analysts cited the company's margins as an ongoing area of concern. Excluding items, the Palo Alto, Calif.-based firm reported an operating margin of 9%, down from 10.4% in the prior year's quarter.

Faced with a tough competitive landscape and an uncertain PC market, investors will be keen to see whether HP again sacrifices margin for market share.

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Recent results from HP's competitors, however, may provide some hints about the company's first-quarter performance. Weakness in the PC market has weighed heavily on HP in recent years, although Intel's (INTC) fourth-quarter results last month may indicate that the sector is bottoming out. IBM (IBM), though, highlighted hardware challenges when it reported its own fourth-quarter numbers, with revenue from its System and Technology group plunging 26% year over year. Shortly after, the Armonk, N.Y.-based firm announced the sale of its x86 low-end server business to Lenovo.

HP's free cash flow (FCF), crucially important for generating healthy dividends, will also be under the microscope. During its fiscal fourth quarter, HP's free cash flow was $2 billion, down from $3.5 billion in the prior year's quarter. In the company's fiscal third quarter, free cash flow also came in at $2 billion, down slightly from $2.1 billion a year earlier.

The Palo Alto, Calif.-based company is, of course, still in the throes of a massive restructuring effort, with CEO Meg Whitman 26 months into an ambitious five-year plan to revitalize the company. Whitman described fiscal 2013 as "a fix and rebuild year," with "recovery and expansion," "acceleration" and "industry-leading competition" characterizing the years 2014 through 2016.

Here's what Wall Street analysts are saying ahead of HP's results:

Credit Suisse analyst Kulbinder Garcha (Neutral, $30)

"We forecast F1Q14 (January quarter) revenues of $27.1bn (-4% y/y, -7% q/q) and EPS of $0.85 vs. consensus of $27.2bn/$0.84. Macro and IT spending continue to be uneven and as a result, HP formally increased restructuring to 34,000 employees from 29,000 previously. While these restructurings mitigate earnings pressure, we note that this continues to affect FCF. Longer term, secular concerns across HP segments raise concerns."

"FCF remains a critical benchmark. A key driver for the stock remains the level of FCF the company generates. FCF for FY13 was $9.1bn, and we expect FY14 FCF of $6.7bn, negatively impacted by restructuring charges & working capital. We view management FCF guidance of $6-$6.5bn as conservative."

ISI Group analyst Brian Marshall (Neutral)

"Despite some progress and stabilization, we continue to believe serious secular/competitive pressures in most of HPQ's end markets (e.g., PCs, printing, servers, storage, services, etc.) are too difficult to overcome and remain concerned FY14 guidance for modest EPS growth could prove optimistic. We see some downside potential in Jan-14 with our estimates of $28.0bil/$0.82 (vs. Street at $27.2bil/$0.85 and guidance of $0.82-0.86 EPS). For FY14, we see risk to HPQ's guidance of $3.55-3.75 EPS and model $3.50 based on revenue down ~1% y/y and margins down slightly. At current levels, we believe the stock requires both a return to sales growth and operating margin expansion in CY14 which we see as unlikely."

Cantor Fitzgerald analyst Brian White (Hold, $23)

"After a 96% increase in HP's stock price in CY:13 and our projection of a 10% EPS decline, we believe investors will increasingly require convincing proof that HP's turnaround has long-term, fundamental underpinnings that have the potential to re-position the company for the next wave of IT spending growth."

"We expect the overall IT spending environment to remain muted in 2014, while HP will now have to contend with a privatized Dell that we believe will have more lead way on pricing, the increased prevalence of ODMs in the data center and a more ambitious Lenovo that announced plans to purchase IBM's x86 server business in January. Also, next generation software vendors are showing momentum. We are modeling all business segments at HP to fall QoQ in 1Q:FY14 and nearly all groups (except for the Enterprise Group) to decline from a year ago."

UBS analyst Steven Milunovich (Neutral, $28.50)

"Unlike other enterprise names, HP mostly has been making its guidance without too great a struggle thanks to cost cutting. We look for revenue of $27.2bn (consensus same) and non-GAAP EPS of $0.83 (consensus $0.84). The revenue upside of last quarter is not as likely given less Indian PC revenue and x86 server share gain. Also, January was a weak month for some rivals. The good news is that greater printer placements could bolster supplies growth later in the year."

-- Written by James Rogers in New York.

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