Updated from 9:08 a.m. EDT

Hewlett-Packard

(HPQ) - Get Report

shares sawsome welcome sunlight Wednesday morning, rising sharply aday after the company delivered a slight upsidesurprise on second-quarter revenue and posted earningsin line with Wall Street estimates.

H-P also issued a new revenue outlookthat suggests it could see an extra $1 billion inrevenue in the second half of 2004, if business goeswell, though it only affirmed the current salesestimate for the period.

The stock, which has lagged most of its tech peersover the past few months, was recently up $1.14, or 5.8%, to$20.97 after trading as high as $21.34 earlier.

Though many investors seemed pleased by the second-quarter sales upside, with potentially more to come,some analysts pointed out that H-P doesn't appear tosee the potential for corresponding gains in profit.

At First Albany, Joel Wagonfeld noted thedisparity between above-expected revenue and in-lineearnings per share as a reason for investors to stayon the sidelines. "Despite the stock's attractivevaluation, we maintain a neutral rating in light of the lack ofoperating leverage -- now and in the near future," hewrote Wednesday morning. First Albany doesn't have abanking relationship with H-P.

To be sure, other analysts said a solid quartercombined with H-P's bargain valuation makes it acompelling buy. CIBC upgraded the shares to a sector-outperform rating, saying H-P has been building itstrack record. Analyst Ali Irani said the latestresults should help allay Street concerns about whatWall Street calls "uneven execution" -- H-P's tendencyto deliver periods of outperformance followed byless-than-stellar quarters.

"We believe fundamentals and cheap valuationprovide superior risk/reward into the second halfseasonal lift," wrote Irani. "We note $700 millionupside to sales driven by quarter-on-quarter growth ineach segment but personal systems

computers, whichnonetheless was profitable again and outgrew the PC marketon 17% year-on-year gains."

CIBC hasn't done recent banking for H-P.

On a related angle, Fulcrum Global's Robert Cihranoted that H-P "has recently underperformed even aweak tech tape," leaving its P/E at just 13.5 times hisforecast for calendar year 2004 earnings. He has a buyrating on the shares, saying he sees potentialleverage in earnings and the stock's price-to-earnings multiple.(Fulcrum doesn't do investment banking.)

For the quarter ending April 30, sales at the computer hardware giant rose 12% year over year to $20.1 billion, above the consensus estimate for $19.3 billion.

Net income totaled $884 million, up from $659 million a year ago, or 29 cents on a per-share basis.

A settlement of $105 million with the Canadian government over a contractual dispute (net of a previously recorded amount of $35 million) reduced EPS by 2 cents on both a pro forma basis and according to generally accepted accounting principles.

Pro forma profit totaled 34 cents, even with the consensus estimate.

H-P also hiked its sales outlook for the second half of 2004 to a range of $39.7 billion to $40.7 billion, up from the current consensus estimate of $39.7 billion.

The company expects pro forma earnings of 74 cents in the final two quarters of the year. The EPS expectations reflect an impact of about 8 cents per share for amortization of purchased intangible assets and acquisition-related charges.

H-P's Chief Executive Officer, Carly Fiorina, repeated a prior forecast that U.S. corporate information technology budgets are likely to rise only 1% or 2% this year. In the meantime, she said in a separate comment, "It is in our best interest to put intense pressure on Dell's core business."

The two rivals are locked in an ongoing fight for market share in the PC business.

By division, H-P's computer arm saw a second-quarter sales rise of 17%, to $6 billion, and it recorded an operating profit of $45 million, an increase from last year's $23 million profit.

Enterprise storage and servers reported revenue of $7.7 billion, up 11%, with operating profit up $108 million to $400 million.

Meanwhile H-P's flagship printer line saw record second-quarter revenue of $6.1 billion, up 11%. Operating profit stood at $953 million, or 15.6% of revenue. Many analysts have

expressed concerns about H-P's stated expectations for its operating margin in the printer arm to decline to around 13% to 15% over time.

On a postclose conference call, Fiorina acknowledged that there had been "a lot of rhetoric" in the printer arena from competitors such as Dell, which has made inroads in the business over the past year.

But the CEO said H-P had posted record revenue and profit in the division, and has gained share in the U.S. single-function and all-in-one inkjet printer market.

In at least two printer submarkets Dell has gained share at the apparent expense of Lexmark, not H-P, she noted.