H-P's Problem Is Europe, Not the Euro

Hedging currencies helped H-P dodge the euro drop, but there's nothing handy to offset a slumping Europe.
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NEW YORK (

TheStreet

) --

Hewlett-Packard

(HPQ) - Get Report

assures us we can stop worrying about the falling euro, leaving us to focus instead on a faltering Europe.

After

H-P posted strong numbers

for the April quarter and offered an improved outlook Tuesday, the company addressed analysts' questions on a conference call. Like many investors, analysts were a bit curious about what H-P was seeing in Europe.

More specifically, they wanted to know if H-P saw anything scary. You know, given the looming financial turmoil in Greece and that nasty downward tug on the financial system of the sweet 16 eurozone nations.

On the euro, which accounts for about 25% of its total revenue, H-P says there were off-setting moves like hedging and lower local currency costs to blunt the impact of a lower euro.

"The actual impact of volatile currencies on our profits and losses, especially the euro, is much more muted than you might believe," CFO Catherine Lesjak told analysts on the earnings call.

So how does H-P dodge a falling euro? Mostly through a little financial bobbing and weaving that can help neutralize the wild swings in the market.

H-P, like

Cisco

(CSCO) - Get Report

,

Amazon

(AMZN) - Get Report

,

Coca-Cola

(KO) - Get Report

and most

multinationals, plays in the derivatives market

like a hedge fund manager, creating credit swaps, placing options orders and entering futures contracts to lock in fluctuating currency rates. As of January, H-P had $14.6 billion of its total $23.5 billion hedging derivatives on foreign currency exchange contracts.

Not only does all the hedging help buffer H-P's euro exposure, the drop in value of the local currency effectively helps lower costs in tandem with lower revenue.

CEO Mark Hurd told analysts on the call that the euro situation wasn't all that frightful.

"A higher euro is good for us with our business in Europe, but a bad euro isn't probably as negative as some of the things that at least I've seen written," Hurd said, according to a transcript on SeekingAlpha.

So if the euro isn't a problem, that leaves investors to wonder about the health of tech spending in Europe amid a financial storm. How will demand for new tech gear fare as southern European nations like Greece, Spain and Portugal run into trouble paying back debts, leaving the rest of the euro-partners on the hook?

H-P raised its July quarter sales guidance slightly based on seasonal improvements and the contribution in networking gear sales from the acquisition of 3Com. And as for outlook, Hurd said he felt "good" about Europe and thought the company has an "attractive channel position" there.

Translation: He's optimistic that Europeans will ignore the economic warning signs and buy all the printers, servers and computers that are being shipped their way.

In other words, it's a blind forecast guided by optimism.

Let's hope H-P is right.

--Written by Scott Moritz in New York.

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