IBM & HP: Tech Titans Facing Headwinds

NEW YORK ( TheStreet) -- IBM ( IBM) and HP ( HPQ) may be tech heavyweights, but both companies are facing tough challenges as they head into an uncertain earnings season.

Big Blue reports its second-quarter results after market close on Wednesday amid growing macro-economic concerns, particularly overseas. The Americas accounted for just 42.5% of IBM's total first-quarter sales, highlighting the company's exposure to risks such as Europe's ongoing debt crisis.

Despite IBM's reputation as a stable stock for uncertain economic times, the company's shares have slipped more than 8% to $185.10 during the last three months, easily outpacing the Nasdaq's 3% dip.

IBM, which often sets the tone for tech earnings season, has some major hurdles in its path, according to Brian Marshall, an analyst at ISI Group.

"In our view, valuation is full and with currency headwinds worse than expected, coupled with around 60% international exposure, maintaining more than 10% EPS growth will become increasingly difficult," he explained, in a recent note.

The analyst, who has a neutral rating on the Armonk, N.Y.-based Dow component, has lowered his second-quarter revenue estimate to $26.3 billion from $26.6 billion. Marshall also lowered his earnings forecast to $3.39 a share from $3.41 a share.

Analysts surveyed by Thomson Reuters are looking for revenue of $26.3 billion and earnings of $3.42 a share in the June-ended period.

IBM missed Wall Street's revenue forecast in its first-quarter results earlier this year, weighed down by lackluster year-over-year services growth and falling sales in its Systems and Technology group. The hardware and software giant, however, raised its earnings estimate for fiscal 2012 to at least $15 per share from from $14.85.

ISI Group's Marshall acknowledged that IBM has been "a model of steady execution" in recent years, but expects little change to his $15 2012 earnings estimate after the report.

Even bigger clouds are gathering over HP, which has seen its shares tumble more than 20% in the last three months.

HP shares came under particular pressure last week after printer maker Lexmark ( LXK) cut its second-quarter outlook, citing a weaker-than-expected demand environment, particularly in Europe, and unfavorable changes in currency exchange rates. These trends hardly bode well for HP.

HP's Imaging and Printing Group (IPG) accounted for 20% of the company's total revenue in its recent fiscal second-quarter results. IPG sales declined 10% compared to the prior year's quarter, underlining the challenges HP faces in the printing space.

On a geographic basis, HP is also especially vulnerable to spending patterns on the other side of the Atlantic. Europe, the Middle East and Africa (EMEA) accounted for more than a third of the firm's second-quarter revenue, even after declining 7% year-over-year.

Additionally, HP is in the throes of a major restructuring, recently announcing plans to cut 27,000 jobs, or 8% of its workforce, by 2014

" HP stock is cheap for a reason," noted J.P. Morgan ( JPM) analyst Mark Moskowitz, in a recent note. "The company's revenue and earnings growth profiles stand to be under pressure in the near term, owing to company-specific issues, macroeconomic challenges, and the ill-effects of currency fluctuations."

Moskowitz rates HP shares at underweight.

Analysts surveyed by Thomson Reuters are looking for HP to report earnings of 97 cents a share on revenue of $30.28 billion for its fiscal third quarter ending in July. The company is expected to report its quarterly results on August 22.

-- Written by James Rogers in New York.

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