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Hewlett-Packard Hangs Tough

Shares rise after the company shows some fight in a tougher economy.

SAN FRANCISCO -- With its strong first-quarter earnings report, shares of Hewlett-Packard (HPQ) - Get HP Inc. (HPQ) Report recovered only modestly what a bleak macro outlook has taken from the stock in the past two months.

But compared to the rest of the tech sector, that's no small accomplishment.

Shares of H-P were recently up $3.66, or 8.3%, to $47.61 on Wednesday, still off its one-year high of $53.48 recorded Nov. 6.

In addition to beating Wall Street's first-quarter estimates the company boosted its second-quarter and full-year projections, raising the latter by 17 cents a share, or 5%.

While the strong first quarter was generally expected, "the significant raise to F08 guidance was a pleasant surprise and hammers home an important point," Needham analyst Richard Kugele wrote in a research note Wednesday.

Driven by H-P's presence in the fast-growing emerging markets and more cost-cutting on the horizon, the company is positioned "to outperform even in a softer macro environment." Kugele's compensation may include the firm's investment-banking revenue.

Due to the

strong report and higher guidance, several analysts who boosted earnings estimates Wednesday also raised their price targets. But some pulled back, trimming the consensus target price in the face of macro headwinds.

The consensus 12-month target estimate stands at $58.50, just short of H-P's prereport estimate of $59, according to Thomson Financial, indicating some retreat in the analysts' estimates.

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Caris reportedly lowered its target to $55, from $60, according to Briefing.com.

But in raising his target price to $58 from $56, UBS analyst Ben Reitzes wrote Wednesday that H-P's guidance could be conservative and "is very solid considering" the macro outlook.

"In this tough and unpredictable macroeconomic environment, we continue to believe H-P represents the most defensive play in the IT hardware sector," with 69% of its revenue comingfrom outside the U.S., Reitzes stated. H-P is a non-investment banking client of UBS.

"HPQ remains a cost-reduction story (IT savings, real estate consolidation) along with efforts to accelerate growth, which may make it less susceptible to weakness," noted Bear Stearns analyst Andrew Neff, in lifting his price target to $70 from $68. H-P is a noninvestment banking client of the firm.

Hewlett-Packard CFO Catherine Lesjak did raise the specter of rising component prices in 2008. Pricing on memory chips and other components "was more favorable than we had expected" in the first quarter, she said. "You saw that in the margin expansion at the H-P company level."

But memory pricing "seems to be stabilizing," Lesjak said. "We're pricing in the fact that memory will be tougher than in the last couple of quarters. You're seeing some firming in prices in LCD panels as well."

H-P improved its gross margin 60 basis points overall, year over year, to 24.5%, in part due to price reductions on memory chips in its PC group. The printer group improved operating margin 40 basis points year over year, to 15.7%.

In the enterprise storage and servers group, revenue rose 9% year over year to $4.8 billion. The brightest spot in this group was server blades, which grew 81%. Industry standard servers grew 11%, which accounts for the lion's share of the group's revenue. For the second consecutive quarter, business-critical systems were up 1%, after years of decline. Also within ESS, the storage segment was up 10% year over year, with its midrange arrays growing 14%.

Sales of individual notebooks rose 49% year over year, boosting revenue by 37%. Desktop units and revenue rose 15%.