Hewlett-Packard Set to Make Amends

The tech giant seems unlikely to disappoint Wall Street again.
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Following a soggy financial report in August, Wall Street's looking for spiffed-up results from

Hewlett-Packard

(HPQ) - Get Report

when it reports fiscal fourth-quarter results after the market closes today.

A boost from strong PC sales may help restore the company's computer unit to the black, while cost-cutting could finally push H-P's server and storage unit back to profitability. Plus, margins from printing are expected to improve, helped by higher-margin products rolled out in H-P's Big Bang 2 launch.

The Big Bang 2 was a follow-up to last year's overhaul of consumer printers. This year, the products ranged from printing and imaging software to scanners, cameras and PCs.

Given that H-P missed estimates last time around, "we suspect H-P pulled levers necessary to get the company over the bar, so we are not inclined to bet against October results," Merrill Lynch analyst Steve Milunovich said in a note. He has a neutral rating on H-P; Merrill has done banking for the company.

Milunovich estimates H-P can achieve his above-consensus estimates for $19.1 billion in sales and earnings per share of 36 cents, both at the high end of H-P's own guidance.

In August, H-P forecast fiscal fourth-quarter sales would rise 8% to 10% sequentially -- to $18.8 billion to $19.1 billion, and established an earnings range of 34 cents to 36 cents per share. Analysts' consensus estimates fall in the middle of that range, pegging sales at $19 billion and earnings at 35 cents.

Also positive is Fulcrum Partners' Robert Cihra, who expects H-P to benefit from the celestial convergence of several powerful forces, including strong PC sales, courtesy of the recent industry upturn, plus a "sizable" sequential jump in printing due to seasonal trends and an upgrade of some products.

Equally important, Cihra and other analysts expect H-P to finally haul its enterprise segment into the black, helped by fortuitous seasonal-demand trends and cost reductions from layoffs.

Milunovich likewise believes H-P can finally show a profit in servers and storage. "Although Unix demand overall is moderate and pricing difficult, we think the high-end Superdomes had a good quarter, benefiting margins," he observed.

Both analysts predict H-P also can restore profitability in its computer arm, in accordance with CEO Carly Fiorina's pledge in August. (On a cautionary note,

Dell

(DELL) - Get Report

has hinted that H-P has been snapping up low-end consumer sales.)

In the preceding fiscal third quarter, the PC business swung to a loss after H-P cut prices on its computers too steeply.

But at this point, "positive seasonality and price corrections should have supported a return to at least modest segment profitability in the fourth quarter," Cihra wrote. He has a buy rating on H-P; Fulcrum doesn't do investment banking.

Meanwhile, operating margins in H-P's powerhouse printer division are expected to grow from 14.1% in the July quarter to 15.7% in the October quarter, according to Lehman Brothers' Dan Niles, who cites both "reasonable" pricing trends and momentum from H-P's Big Bang 2 product rollout. Lehman, which has an overweight rating on H-P, has a banking relationship with the company.

As for outlook, Wall Street is currently gearing for flat revenues and earnings in the current quarter, although Niles thinks earnings could ebb by a penny to 34 cents from his October quarter estimate of 35 cents.

Milunovich and others expect H-P to cover the same ground as competitors like Dell,

IBM

(IBM) - Get Report

,

Sun Microsystems

(SUNW) - Get Report

and

EMC

(EMC)

when it comes to financial commentary. Though none of H-P's peers have proclaimed a recovery, they've suggested business is stabilizing and have sounded more optimistic about the future.

Against that improving economic backdrop, portfolio manager Matt Kelmon calls H-P "dirt cheap." He's been adding to his position in H-P, which currently accounts for about 3.9% of the

(KSEAX)

Kelmoore Eagle fund he manages.

"H-P trades at a little under two times book value and 18 times

2003 estimates, which is cheaper than the market multiple of about 20," Kelmon said. "And to me, in a recovering economy, that 18 times is probably very conservative because earnings are on the rise."

Though Kelmon acknowledges that H-P has had trouble in PCs, where it has lost share to Dell, he likes its strong printer business and says he's bullish on its just-announced entry into copiers.

"I can't see why they wouldn't make huge inroads really quickly that will add to the bottom line," he said. "People know the quality of their printers. And though copiers are new, they're kind of like a cousin to printers. If someone is ordering a new copier, why would they order from

Xerox

(XRX) - Get Report

, which is always troubled," rather than H-P?

As expected, Hewlett-Packard on Tuesday unveiled a push into the $24 billion copier market with a line of high-volume printers and services that it claims will cut copying costs by as much as 30%.

H-P shares fell 1.6% to $21.65 in a weak market Tuesday, but still remain fairly close to their recent 52-week high of $23.90.