HP Earnings Preview: What Wall Street's Thinking

NEW YORK (TheStreet) -- HP (HPQ) reports fiscal second-quarter earnings after the close and investors will be looking to see whether CEO Meg Whitman can continue to cut costs and turnaround one of Silicon Valley's most prestigious companies.

Under Whitman, who took over from former CEO Leo Apotheker, the Palo Alto, Calif.-based HP has focused on cutting costs, improving the company's balance sheet and tweaking the product portfolio, as it looks to new areas of growth, including 3-D printing, cloud computing and services for growth.

For the second-quarter, analysts surveyed by Thomson Reuters expect HP to earn 88 cents a share on $27.42 billion in sales.

Though the PC industry is still contracting, according to the latest estimates, HP still derives a large portion of its revenue from its Personal Systems (PCs) and Printers segments. Both of these segments drove $14.3 billion in revenue last quarter, nearly half of the $28.1 billion in total sales.

HP is doing particularly well in Europe, the Middle East and Africa, according to research firm Gartner, as HP owned 16% of the PC market, selling 12.2 million units, up from 15.1% or 11.78 million in the year ago quarter.

On HP's fiscal first-quarter earnings call, Whitman noted that HP is still turning around the company in its five-year strategic roadmap to fix the company and reignite it for growth, while rebuilding and repairing the balance sheet. "Our focus on rebuilding our balance sheet has resulted in an improvement of our operating company net cash position by more than $6 billion in the first quarter of 2013," Whitman said on the call. "We have strengthened our relationship with customers and channel partners, something I see every day in my interactions with them, and our global workforce is fully aligned behind the common vision of the company, delivering solutions for the new style of IT. And we are seeing acceleration in the industry's movement towards that new style of IT."

Shares of HP were lower in Wednesday trading, off 0.58% to $32.61 ahead of the results.

Going into the earnings release, analysts were largely positive, noting that there could be some upside surprise in the results, as HP continues to work on improving its cost structure. Here's what a few of them had to say.

Jefferies analyst Peter Misek (Neutral, $30 PT)

We think HP continues to execute better and our survey results indicate a relative stabilization of demand. For the quarter we estimate revs/EPS of $27.8B/$0.89 vs. St of $27.4B/$0.88. Our Enterprise OM estimate is below the St; we see hardware as still broadly challenged as HP transitions to next-gen systems; however, we think better margins from Printers and PCs (benefiting from XP end of life in Apr).

Cantor Fitzgerald analyst Brian White (Hold, $30 PT)

Given our expectation that the rotation into the larger-cap, more traditional tech names can continue, we are boosting our 12-month price target on HP to $30.00 from $27.00.
In light of HP's restructuring initiative and certain tailwinds in the portfolio, we believe the company can at least deliver in-line results in the near term; however, we believe the longer-term picture will prove more complicated, as competitors have more aggressively invested in next-generation technology architectures.

BMO Capital Markets analyst Keith Bachman (Market Perform, $38 PT)

For the April quarter, we believe that revenue and EPS will be in line with consensus, though we do see some upside tension in EPS estimates vs. our/consensus of $0.88. We don't think HP will change its FY14 EPS guidance. We project enterprise systems revenue to decline by 4% q/q, owing to lower Moonshot orders compared with the past two quarters, even with some share gains in racks, blades, and towers at the expense of IBM. However, we think HP's enterprise systems margins could improve modestly q/q due to lower relative Moonshot revenue. We believe that services operating margins will increase q/q to 2.9%, from ~1% in the January quarter, and vs. 2.5% in the April 2013 quarter. As we stated in our report "Going Deep on HP, More Room for the Multiple" dated Feb 13, 2014, we think that HP services will be the key driver of growth in operating profit dollars longer term. We think that HP's business mix is comparable to Capgemini, which earns close to 9% operating margins and, longer term, we believe that HP can reach the same margin levels.

>>Read More:

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--Written by Chris Ciaccia in New York

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