H-P Defies Tech Trend

But its blowout quarter hasn't cut the likelihood of an industry slowdown.
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SAN FRANCISCO -- Investors prayed for a sign that tech stocks will not wither in an economic drought, and

Hewlett-Packard

(HPQ) - Get Report

answered loud as thunder.

With notebook PC sales and international demand booming, as well as strong corporate-server and software sales, H-P once again chewed up analyst expectations, reporting healthy top- and bottom-line growth in its fiscal fourth-quarter.

Shares of H-P were up 38 cents to $49.82 in midday trading Tuesday, helping the broader markets recover from the prior day's selloff.

But in celebrating H-P's blowout fourth quarter, investors may be missing a less-than-rosy outlook for the future.

For one thing, the widely feared slowdown in tech spending never involved the recently ended quarter -- the risk lies in what could happen in the quarters ahead.

After all,

Cisco

(CSCO) - Get Report

also delivered a strong quarterly report earlier this month. It was CEO John Chambers' comments about the future that sank the stock and sent shudders across the markets.

H-P CEO Mark Hurd was careful not to fall into the same trap, refusing to be pinned down when questioned by analysts about the current macroeconomic trends that H-P sees.

"I don't want to be confused with an economist in any way, shape or form," Hurd said.

He did note that H-P hasn't seen any change in ordering patterns from financial customers, although he acknowledged that H-P has only a small exposure to the segment.

A look at H-P's financial guidance -- cheered by many as a better-than-expected forecast -- provides a more complete, and somewhat less reassuring, picture of H-P's economic view.

H-P's fiscal first-quarter revenue guidance of $27.4 billion to $27.5 billion was technically above Wall Street's expectation of $26.9 billion.

But the guidance is actually worse than expected when viewed in terms of the growth rate over the quarter just reported. Wall Street expected H-P's fiscal first-quarter sales to decline 1.8% sequentially. H-P's guidance suggests a decline between 2.8% and 3.2%.

More telling is the full-year outlook for fiscal 2008.

H-P's forecast of $111.5 billion implies 7% year-over-year growth. That's a significant deceleration from the 13.8% growth that H-P experienced in fiscal 2007.

Of course, 7% is still above the 4% to 6% growth rate that H-P maintains represents its regular cruising speed.

Matters get more complicated when one factors in the effects of foreign currency exchange rates, which have been inflating growth rates at H-P and other companies.

H-P executives would not comment on what impact exchange rates will have in the 2008 outlook, noting that future exchange rates are too unpredictable.

"We're not sure where this thing is going to land," Hurd told analysts.

Still, if one assumes that exchange rates remain at their current levels, H-P's guidance looks pretty weak.

According to Deutsche Bank analyst Chris Whitmore, H-P's 2008 outlook actually calls for revenue growth of only 3% to 4% once the favorable effects of currency are removed.

"To some extent, we believe H-P is issuing traditional conservative guidance, due to the growing uncertainties in the macro outlook," Whitmore wrote in a note to investors Tuesday.

"Given Deutsche Bank's view of slowing GDP growth in both the U.S. and Europe in 2008, we expect H-P's growth to slow through 2008, acting as a cap to H-P's multiple," added Whitmore, who rates H-P shares a hold.

Deutsche Bank makes a market in H-P shares and has received compensation for investment and noninvestment banking services from H-P in the past year. One of the Deutsche Bank analysts who cover H-P, or a member of that household, has a direct ownership position in H-P.

The bullish sell-side analysts -- who are far more common -- remain positive on the stock despite the lackluster guidance.

A flurry of notes Tuesday point out that H-P's broad diversification, including the fact that 67% of its revenue comes from outside the U.S., should help it in the event of an economic downturn in the U.S.

And there are plenty of investors who believe the company's fundamentals under Hurd are more important than any short-term market volatility.

"We think the competitive advantages this company has are still intact," says Robert David, an analyst at Hillman Capital Management, which owns H-P shares. "They still favor H-P going forward, and right now we don't see anything to change that."

Indeed, H-P continues to take market share in the PC business, and the company claims it now ranks as the world's sixth-largest software company.

But even the best-run corporations are not entirely immune from economic cycles. And as much as H-P dazzled in the fourth quarter, it did not kill the specter of a potential downturn.