Investors giddy over

Hewlett-Packard's

(HPQ) - Get Report

unexpectedly good quarter propelled the stock to double-digit gains Thursday. Shares tacked on $2.43, or 14%, to $19.28.

The Street lauded signs that the merger integration with Compaq is progressing at a nice clip, and several analysts nudged up estimates for fiscal 2003, which began in November, suggesting potential upside from management's conservative first-quarter guidance. Yet some of the same pundits also sounded notes of caution and made a point of maintaining their current neutral ratings, highlighting concerns that could constrain the shares over the longer term.

On the plus side, H-P managed better-than-expected showings in PCs and enterprise systems, points out Merrill Lynch's Steve Milunovich, who has a buy rating on the stock. His firm has done no banking for H-P in the past year. In the short term, he thinks H-P may see some boost from seasonal trends, notwithstanding the company's careful guidance, because the premerger H-P often saw its best earnings in the first quarter.

How the Pieces Fit

Progress on integration also was impressive, he adds, with continuing cost reductions likely to keep the Street satisfied through the first half of fiscal 2003. But H-P remains primarily a cost-cutting story, with Milunovich expecting only 1% revenue growth next year.

Over the longer term, he argues, H-P will need to reduce its dependence on computer hardware and profits from the printer business while boosting its software and services business, possibly through acquisitions. One possibility: an H-P/EDS combination. It would be "interesting, if H-P truly wants to challenge

IBM

(IBM) - Get Report

," he speculates.

On the basis of similar strategic concerns about H-P, First Albany's Walter Winnitzki says he's keeping a hold rating on the stock, though he notes that it isn't a bad value at current levels. The printing division alone is worth about $15 to $16 a share, he says -- which would suggest that, at yesterday's closing price, investors valued the rest of the company at less than $2.

Meanwhile, yesterday's strong results prompted him to boost next year's earnings estimate by a nickel, to $1.15. Still, he decided not to raise his investment rating because of concerns about H-P's weak position in software and services, as well as what he considers a fuzzy strategic focus -- the company currently attempts to compete from both the low-cost and value-added sides, he notes.

First Albany hasn't done banking for H-P.

Likewise, UBS Warburg's Don Young, who lifted his price target from $13 to $19, kept a hold rating on H-P shares. "Most computer mergers enjoy a 'honeymoon period' immediately following the merger, reflecting faster realization of better-than-expected cost savings and synergies," he says in a note. "Then comes the hard part when retention of the customer base and holding the revenue lines becomes much more difficult. HPQ is early in the process and may have benefited in this quarter from revenue disruptions last quarter during the consummation of the merger."

In the short term, he adds,

Dell

(DELL) - Get Report

could take a sales hit if H-P sticks with its tough pricing strategy or gets more aggressive. Dell shares were off 32 cents, or 1.1%, to $28.89 in late-afternoon trading.

His firm hasn't done recent banking for H-P.

No New Money

A.G. Edwards hewed to a similar line: Though existing investors shouldn't sell, the investment bank says it wouldn't recommend putting new money in H-P, since continuing operating losses and integration risk will limit upside. A.G. Edwards hasn't done banking for H-P.

One exception to the relatively guarded takes on H-P was Deutsche Bank, which has done banking for the company. Analyst George Elling, who has a buy rating on the stock, maintains one of the more generous price targets on the Street, at $23. That's 18 times his 2003 estimate of $1.26 in earnings. The consensus estimate is $1.16.

"We still believe there is a long way to go from a turnaround standpoint. However, there is significant upside to Street perceptions of the company, and we believe this could lend favorably to its stock price action," he writes.