Back to Business for H-P

It will welcome attention back to financial results.
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Hewlett-Packard (HPQ) - Get Report lost its chairwoman and its top lawyer in the past three months, as the company came under fire for a controversial corporate spying operation.

But there will be few signs of turbulence when H-P reports its earnings after Thursday's market close.

The Palo Alto, Calif., tech giant is expected to deliver another quarter of solid results, as the turnaround undertaken by CEO Mark Hurd continues to move forward.

The spying scandal is driving a lot of negative publicity for the company, says Standard & Poor's equity analyst Richard Stice. But the imbroglio doesn't appear to have disrupted H-P's business operations in any significant way, he says.

Analysts polled by Thomson First Call expect H-P to earn 64 cents a share on sales of $24.1 billion in its fiscal fourth quarter, a sequential and year-over-year improvement.

And investors have bid up the firm's shares nearly 17% since mid-September, with the stock closing at $39.79 on Wednesday.

While H-P's ethical lapse made international headlines during the past few months, the company achieved various milestones on the business end.

H-P acquired

VoodooPC

, a maker of high-end gaming PCs, for an undisclosed sum in September.

And the company stole the crown from

Dell

(DELL) - Get Report

to become the world's No. 1 PC vendor by unit shipments in the July-September quarter, according to industry research firm Gartner.

Once considered a drag on the company's business, the PC group has earned its keep in recent months. In its third quarter, H-P grew its PC sales 8% year over year.

And the PC business logged a 4% operating margin in the third quarter, the highest level since the 2002 merger with

Compaq

and at the high end of the group's 3% to 4% target for 2007.

Some industry observers believe there's still room for margin expansion under Hurd, who has repeatedly beat Wall Street profit expectations during his nearly two-year tenure.

To be sure, H-P's profitability is getting a big boost from Hurd's early decision to lay off some 15,000 H-P employees.

But the company's focus on improving its internal operations, from sales practices to supply-chain logistics, appears to be paying off as well. In the third quarter, for instance, H-P executives said the company stocked up on notebook flat-panel displays to take advantage of favorable pricing from suppliers.

A.G. Edwards analyst David Wong says that H-P is unlikely to best last quarter's 14.2% margin in the printer group -- the company's most profitable business -- but he sees margin upside potential in the PC and services business in the fiscal fourth quarter.

Wong expects H-P's overall operating margins to reach 8.6% in the recently completed quarter, compared to the 7.6% margin in its fiscal third quarter.

As always, the top line is another matter.

If H-P makes its guidance, it will add a whopping $1.3 billion to its top line from the same time last year. But that represents a relatively modest 5.4% growth rate.

The $4.5 billion acquisition of

Mercury Interactive

, which closed earlier this month, signals that H-P is not afraid to look outside for growth. But the extent to which H-P intends to rely on M&A to supplement its organic growth going forward remains to be seen.

And absent any major new growth drivers, some view the stock as fairly valued with its 16 times multiple on forward earnings.

H-P is largely a cost-cutting story, says S&P's Stice, who rates the stock a hold with a $40 price target.

"You have to wonder how much more can they squeeze out from a cost standpoint," he says.

H-P may provide some answers to the question on Thursday.