The Ax: H-P Falls Back into Favor with Analysts

Tech old-timers like Sun Microsystems (SUNW) and IBM (IBM) have dazzled the Street with their soaring earnings. Now it's the turn of the last of the hardware titans, Hewlett-Packard (HWP), to regain its footing and join the elite.

Analysts and investors think the time is right. Goldman Sachs analyst Laura Conigliaro raised her rating from market perform to market outperform Friday, and she was followed by the influential Merrill Lynch hardware analyst Steven Milunovich, who upgraded H-P Monday. Conigliaro and Milunovich represent the top two analysts on the Street when it comes to the Palo Alto, Calif.-based computer and peripherals company. H-P reports on Feb. 16.

"The near-term picture looks good," says Conigliaro. Cost controls and improved printer performance are the reasons, she notes. It's the longer-term picture, say the two, that is still a bit more uncertain.

That's because H-P's long-term strategy has been nonexistent for some time. "H-P seems to lack a clear vision," Conigliaro says. Last May, she and a host of other analysts got burned on the stock, when a suddenly volatile H-P shot up from 65 to 81 and then preannounced shortly thereafter that it would not meet earnings estimates in the next quarter.

This time, Conigliaro believes that H-P understands its long-term hurdles and plans to embark on a bolder course going forward. "A number of senior managers seem to appreciate that they need to be bolder, more definitive, and think outside of the box," she explains. "Sun, Cisco (CSCO) and Dell (DELL) take these out-front kinds of positions, and there's no reason why H-P shouldn't be thinking the same way."

For his part, Milunovich sees H-P as an underappreciated gem. "H-P's stock was up just 10% last year and earnings growth should accelerate to more than 20% in the second half," wrote Milunovich in Monday's report. Milunovich, who boosted his intermediate-term rating from neutral to accumulate, also raised his first-quarter earnings estimate from 82 cents to 84 cents a share. So far this year, H-P stock is up 18%.

Significantly, Milunovich hears that the company will introduce new offerings in the second half of 1999, including the not-exactly-original ad strategy of proclaiming H-P an Internet company. He also tells clients that H-P will create an Internet division. "H-P admits it missed the first wave of Internet computing, but believes the second wave, utility computing, will be even bigger," he says. Ann Livermore, H-P's head of enterprise solutions, is really pushing this very hard, notes Milunovich, whose firm has done recent underwriting for H-P.

Getting into utility computing places H-P in lockstep with Sun's vision of providing Internet services to businesses. The two companies are competing in the computer server and workstation space. Recently, Sun has nibbled away market share from H-P in the server space, but Conigliaro thinks this will change. "Our bet is that the server business will turn, but that new products won't be meaningful [to earnings] for the next two quarters," she explains. Milunovich adds that H-P is shifting 200 salespeople to its Unix sales unit to combat this.

Strong printer sales in both the laser-jet and ink-jet segments will help carry sales until that point. Conigliaro also expects to see positive results from the company's test and measurement division. "While test and measurement makes up only 10% of revenue, it represents 15% of H-P's profitability," she points out.

Can H-P effectively articulate this long-term vision of utility computing? On Wall Street, which seems to care only about tomorrow and not the next day, it might not matter: H-P's stock was up 3 1/4, or 4%, on the upgrade news in midday trading Monday.

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