Demons Back Off at H-P

The hardware giant's big quarter sends the stock to an 18-month high.
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Updated from 8:54 a.m. EDT

Hewlett-Packard

(HPQ) - Get Report

continues to exorcize its demons.

The hardware giant's shares jumped to their best levels since early 2004 following a better-than-expected third quarter that reflected a resurgence in its personal computer unit. The stock, which was upgraded Wednesday at Bear Stearns and First Albany, was recently up $2.29, or 9.5%, to $25.95.

Higher-margin notebook computer sales accounted for the improved performance in its PC group.

As for H-P's main profit center -- its printing and imaging unit -- the impact of a price war continued to wear on the unit as hardware sales to consumers dropped almost 20%. Operating profit margin in the unit, however, did improve slightly.

The company reported net income of $73 million, or 3 cents a share, on sales of $20.76 billion. During the same quarter last year, H-P earned $586 million, or 19 cents a share, on sales of $18.89 billion.

Excluding charges for repatriated earnings, amortization and restructurings, H-P earned 36 cents a share. The company paid a $788 million income tax bill related to foreign-based repatriated earnings. This accounted for the bulk of its third-quarter charges.

Analysts expected earnings excluding charges of 31 cents a share on sales of $20.47 billion, on average, according to Thomson First Call. At the quarter's start, H-P predicted earnings excluding charges between 29 cents and 31 cents a share and sales between $20.3 billion and $20.7 billion.

Imaging and printing operating earnings were $771 million on sales of $5.91 billion. In the same quarter last year, the unit booked an operating profit of $836 million and sales of $5.65 billion. From the previous quarter, consumer hardware sales dropped 17% and supplies revenue slid 6%. The unit's operating margin improved to 13% from 12.7% in the previous quarter but down from 14.8% in the same quarter last year.

The personal systems group's operating profit jumped to $163 million on sales of $6.39 billion vs. a $23 million operating profit and sales of $5.9 billion in the same quarter last year. From the previous quarter, desktop sales fell 5% and notebook sales rose 9.3%.

Enterprise storage and servers operating profit was $150 million on sales of $4 billion, compared with a $211 million operating loss on sales of $3.33 billion during the same quarter last year.

Operating profit for services shrunk to $256 million on sales of $3.84 billion vs. a $314 million operating profit and sales of $3.48 billion during last year's third quarter.

For the fourth quarter, H-P predicted earnings excluding charges between 44 cents and 47 cents a share on sales of $22.4 billion to $22.8 billion. This excludes an expected charge of $900 million, or 22 cents a share, for H-P's latest slate of 14,500 job cuts announced in July. Analysts had expected earnings excluding charges of 43 cents a share on sales of $22.67 billion.

"I'm encouraged by what we have achieved to date, and we are focused on driving further performance improvements," said CEO Mark Hurd, according to a statement.