Investors Warm to HP but Big Challenges Remain

NEW YORK ( TheStreet) -- Investors have been warming to HP ( HPQ) ahead of its second-quarter results after market close, but there are plenty of hurdles in the path of CEO Meg Whitman.

HP shares, which have risen more than 50% this year, gained 1.28% to reach $21.38 in Wednesday's trading.

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The PC maker, of course, is in the throes of a massive multi-year restructuring effort, which was kicked off by Whitman in May 2012. The former eBay ( EBAY) chief has already described fiscal 2013 as "a fix and rebuild year," with "recovery and expansion," "acceleration" and "industry-leading competition" characterizing the years 2014 through 2016.

Nonetheless, there are plenty of clouds on the horizon. Last week's underwhelming first-quarter numbers from PC rival Dell ( DELL) underlined the scale of the task facing Whitman and HP. Dell's End User Computing sales slumped 9% to $8.9 billion as the PC slowdown continues.

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Investors heaved a sigh of relief after HP surpassed Wall Street's modest first-quarter expectations in February. This, however, should not be seen as a massive uptick in the company's fortunes, according to Brian White, an analyst at Topeka Capital Markets.

"Restructuring cost savings and low market expectations have created the impression that HP is recovering," wrote White, in a note released earlier this week. "However, we continue to believe the path to a sustainable, long-term turnaround will be riddled with challenges and disappointment."

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White has a "sell" rating on HP.

Analysts surveyed by Thomson Reuters are looking for HP to report revenue of $28.01 billion and earnings of 81 cents a share, down from $30.7 billion and 98 cents a share in the prior year's quarter.

Topeka's White expects HP to deliver earnings upside when it reports its second-quarter numbers, albeit in its seventh consecutive quarter of falling profit. "Similar to other IT companies that recently reported either March quarter or April quarter results, we expect HP to discuss a muted IT spending environment with particular weakness in Europe (EMEA at 36% of 1QFY13 sales), combined with continued softness around public spending," he wrote.

Storage giant EMC ( EMC), for example, missed Wall Street's top- and bottom-line estimates in its first-quarter results last month, while networking specialist Riverbed ( RVBD) cited soft government spending when posting weaker-than-expected first-quarter numbers.

HP's arch-rival IBM ( IBM) also missed Wall Street's top and bottom-line estimates in its first-quarter results, with the tech giant's hardware business experiencing a particularly sharp decline.

"Given continued macroeconomic challenges, the enterprise market is expected to remain muted in the near term, placing pressure on HP's end markets," wrote Kulbinder Garcha, an analyst at Credit Suisse, in a note.

The analyst also predicts an "anemic" performance from HP's PC and printing businesses. "Given Dell's recent statement on discounting PCs in order to regain share, HP's position may continue to be challenged," he wrote. Garcha expects the company's Personal Systems Group to generate second-quarter revenue of $8.6 billion, a decline of 9% compared to the prior year's quarter.

During the first quarter, HP's Personal Systems sales declined 8% year over year, while Printing revenue was down 5%.

The Palo Alto, Calif.-based firm will report its second-quarter numbers after market close.

-- Written by James Rogers in New York.

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