HP Preview: What Wall Street's Saying

NEW YORK (TheStreet) –– HP (HPQ) continues to remake itself under CEO Meg Whitman, slashing costs and boosting sales of personal computers, so it can afford to wait for other sectors of its business to catch up.

HP's largest segment by revenue remains personal computers, with sales in its Personal Systems group growing 7% in the fiscal second quarter from a year earlier. The company's results backed up Gartner's analysis in April that HP increased its market share, particularly in Europe, the Middle East and Asia.

For the fiscal third quarter ended June 30, HP expects non-GAAP earnings of between 86 cents and 90 cents a share. Analysts surveyed by Thomson Reuters expect HP to earn 89 cents a share on $26.99 billion in revenue. HP reports results on Wednesday after the market close.

When Gartner released its worldwide PC shipment findings for the first quarter, it found that sales fell 1.7%, to 76.6 million units, but HP showed gains. Thanks to strength in EMEA (Europe, Middle East and Africa), HP owned 16% of the market, selling 12.2 million units, up from 15.1% or 11.78 million in the year-ago quarter. That's good enough for second place behind Lenovo, which continues to dominate the PC market (including -x86 tablets, but not other tablets). Lenovo had 16.9% of the market at the end of the first quarter of 2014, up from 16% a year earlier.

But HP's other segments--including printing, enterprise services, software and financial services--all showed no growth or declines, which led to an additional restructuring and layoffs of 11,000 and 16,000 employees, on top of the 34,000 announced in May 2012.

On the second quarter earnings call, Whitman said the additional layoffs will help long-term efficiency.

"We've actually increased the number of people who will leave the company a couple of times during this program," Whitman said. "And actually on earlier call, we actually signaled that there might be more opportunity. And I am actually not disappointed at all with how we're doing, we just see more opportunities to lower our cost structure, streamline our operations without impairing our effectiveness in fact making us a more nimble and decisive company."

CFO Cathie Lesjak added that the cuts give HP the opportunity to"create more capacity to invest," noting that the tech giant's turnaround hinges on the company's ability to innovate and bring new solutions to the marketplace that are different to the competition's.

Despite the rebound in the PC segment, it's clear HP has a lot of work to do to turn itself around and get the top line growing again. The company is increasing spending in research & development, with CFO Lesjak noting the increase is coming in not one particular segment, but all areas.

"Just about every business that we have is increasing R&D on a year-over-year basis," she said. "Obviously it's focused in strategic areas--cloud, big data, security, page-wide array, 3D printing. So it's really not a specific comment for a particular business."

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Going into Wednesday's earnings report, analysts were slightly bullish. Here's what a few of them had to say:

Deutsche Banka analyst Sherri Scribner (Buy, $40 PT)

"We expect another solid, in-line quarter from HPQ as the company benefits from a stabilizing PC market and improvements in its services business. Longer term, we believe innovations in the Enterprise Group will be the key growth driver for the company, and expect improving margins in Services to drive further operating margin expansion. HPQ is executing well on its 5-year turnaround plan, and we believe continued execution will be the key to further stock upside. With improving margins and a return to modest revenue growth not reflected in the company's current valuation (trading at 9x our FY-15E EPS), we view shares as attractive and HPQ remains one of our top picks."

Goldman Sachs analyst Bill Shope (Neutral, $32 PT)

Investor focus has turned towards the outlook for FY2015 and as a result we view HP's upcoming securities analyst meeting on October 8 as a more meaningful catalyst for shares than this quarter's results. With that said, there are several items to look for on Wednesday including any indication of management's view on the likelihood of revenue growth in FY2015, the trajectory in Enterprise Services margins, and cash generation following a significant improvement in working capital management over the past several quarters. In addition, we look toward commentary on the latest trends in PC and enterprise demand as an important data point for the broader sector. Broadly on HP, our longer-term view of the secular challenges facing many of the company's end markets has been countered by management's ability to "right-size" the cost base through expanding restructuring efforts; we expect this to continue through the medium term, though revenue and gross margin expansion will be critical as we progress into 2015."

Wells Fargo analyst Maynard Um (Outperform, $38 to $40 PT)

"We expect upside to Street Consensus EPS of $0.89 (Wells Fargo: $0.90; EPS Guide: $0.86-$0.90) with revenue largely in line (Street: $27B; Wells Fargo: $26.7B). We expect HP to narrow its FY14 EPS range to the upper end of its previously guided range of $3.63-$3.75 (Street: $3.71; Wells Fargo: $3.73). We expect solid cash flows with potential upside to our $1.6B FCF forecast helped, in part, by strength in the PC business, and putting the company squarely on target to exceed its $6B-$6.5B projection. HPQ reports on 8/20 after market close."

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

"Given improved PC trends in recent months, reasonable IT results across the leading vendors in 2Q:14 and HP's expanded restructuring initiative (announced in May), we believe the company's 3Q:FY14 results and outlook should at least meet our projections. That said, the IT landscape is undergoing rapid change, and we believe HP's competitors are better positioned to benefit from secular trends across the tech landscape, especially as it relates to cloud computing and Big Data."

Pacific Crest Securities analyst Brent Bracelin (Outperform, $40 PT)

"The third consecutive quarter of revenue growth within Personal Systems, combined with improving enterprise fundamentals, should position HP to meet or exceed consensus revenue estimates of $26.96 billion. Our forecast of $27.06 billion assumes a slightly higher contribution from Personal Systems and factors in the assumption that a commercial refresh cycle remains healthy into yearend. The higher PC contribution could weigh on the overall operating margin, given this segment only generated a 3.0% operating margin last year versus the corporate average of 8.5%. Even with a slight downtick in the operating margin based solely on mix, we still expect HP to generate its third consecutive quarter of profit growth, with EPS rising 2% y/y to $0.88."

--Written by Chris Ciaccia in New York

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