The new Hewlett-Packard ( HPQ) just reported on its first postmerger quarter, and Wall Street was distinctly unimpressed. Analysts mostly sounded skeptical about the hardware maker's plans to pull its PC, server and storage businesses out of the red.

Shares of H-P were off 6 cents, or 0.4%, to $14.16 in midafternoon trading. The stock has lost 31% year to date.

On Tuesday, H-P said it aimed to return its computer division to profitability by the second half of 2003. But that looks like an aggressive goal, given the outlook for weak unit growth and the likelihood of continued fierce pricing competition from Dell ( DELL).

The near-term outlook certainly isn't promising: H-P said yesterday that back-to-school shipments were as much as 50% lower than usual. Usually shipments rise 50% to 60% between July and August, but this year the company saw demand increase by only about 30% to 35%.

Analysts sounded even more jaundiced about the prospects for H-P's enterprise business, which includes servers and storage. Calling the quarter a "disaster" for the division, Needham analyst Charles Wolf noted that operating margins had slumped to -11.2% from -5.7% in the second quarter and 0.4% a year ago.

"Despite the clear product road map H-P laid out before the merger, a weak IT spending environment combined with inevitable customer defections and intense pricing competition in Unix servers and storage fueled the decline," he wrote in a research note, adding that the business looks unlikely to be profitable in 2003.

Like many analysts, Wolf lowered his 2003 estimate (from $1.05 to $1) after H-P reported. Now trading at 14 times forward earnings, H-P's shares appear cheap, he says. But he's still not upgrading the stock. "The two divisions crucial to the company's success -- PCs and enterprise products -- which account for over half of its revenues, carry the risk of continuing disappointments in 2003," wrote Wolf. His firm has no recent banking relationship with H-P.

The sole bright spot in a tough quarter was the performance of the trusty printer line, the only division of H-P that could boast positive year-on-year revenue growth, with sales up 9.7%.

"What is surprising is that margins expanded for the fifth consecutive quarter, even after management's repeated assertions that margins are not sustainable at these levels," noted First Albany analyst Walter Winnitzki. First Albany does not have a banking relationship with H-P.

But the bad news is that those margins have likely peaked, he said. They're likely to trend downward over the next few quarters, as H-P invests more in the business and faces increasing competitive pressure from Dell's likely entry into the market.

Now H-P faces a threefold challenge: It has to return its PC and enterprise businesses to profitability, manage the merger integration, and figure out how to respond to a possible market-share grab from Dell in its jealously guarded printer business. That's reason enough for investors to hold off on buying the shares, even if the valuations look decent, says A.G. Edwards analyst Shebly Seyrafi. Seyrafi rates H-P a hold and his firm has no banking relationship with the company.

He doesn't recommend that current investors sell their stake, but he says continuing operating losses and integration risk will limit upside for the stock.