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Why HP's PC Sales Gains May Not Last

NEW YORK (TheStreet) –– Though HP (HPQ - Get Report) has broken its streak of 11 consecutive quarterly revenue declines, that may not last more than a few more quarters, due to a flat to declining PC market.

In the company's fiscal third quarter, Personal Systems revenue was up 12% from a year earlier to $8.6 billion, as both commercial and consumer segments rose 14% and 8%, respectively. However, CEO Meg Whitman cautioned that the growth is coming from a flat to declining PC market, indicating the company is taking share.

"The PC business is flat to declining slightly," Whitman said on the call. "And we think that that will continue. However, what we do believe is we can continue to gain share in a relatively flat market and that's because we've got a terrific product lineup, we've got a great go-to-market, our relationships with partners is better than it has ever been."

The only other segment outside of Personal Systems to grow this quarter was the Enterprise Group, which includes servers and storage and saw 2% year over year growth with a 14% operating margin.

According to research firm IDC, the overall PC market in the calendar second quarter was 74.4 million units, a year over year sales decline of 1.7%, which reflects "the smallest decline in global PC shipments since the second quarter of 2012."

Credit Suisse analyst Kulbinder Garcha noted that some of the improvement came from Microsoft's (MSFT) ending Windows XP, which helped encourage people to buy new computers, but the improvement isn't likely to last, given the state of the PC market.

"Unfortunately, the improvement in PCs is cyclical and may not aid HP's return long-term growth," Garcha wrote in a research note. "The growth imbalance is highlighted by mid-single digit declines in Printing, Enterprise Services and Software. Moreover, while Services margins continue to improve, Printing margins are likely to fade as currency benefits lapse." Garcha rates HP shares "neutral" with a $35 price target.

In the fiscal third quarter ended July 31, HP earned an adjusted 89 cents a share on $27.6 billion in revenue, but outside of the Personal Systems Revenue segment, revenue at the company fell 3% year over year. That includes Printing, Enterprise Group, Enterprise Services, Software, and HP Financial Services. Analysts surveyed by Thomson Reuters were looking for non-GAAP earnings of 89 cents on $27 billion in revenue.

Wall Street has been kind to HP this year, sending shares up 25.5%, compared to a 7.5% gain in the S&P 500, largely due to continued cost-cutting measures, and the potential for upside in free cash flow (management now expects $9 billion in free cash flow in fiscal 2014) and the potential for operating margins to move higher, up from the 3.5% to 4.5% range HP has previously guided.

However, for HP to completely remake itself, it needs to continue focusing on its ongoing restructuring (CFO Cathie Lesjak said HP expects to end the fiscal year with 41,000 people leaving the company), while getting its other operating segments to grow, according to Cantor Fitzgerald analyst Brian White. White raised his price target to $34.50, but stated "the longterm trajectory for HP remains in question."

-- Written by Chris Ciaccia in New York

>Contact by Email.

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