The Palo Alto, Calif., computer and printer behemoth trounced Wall Street's third-quarter profit targets Wednesday and rolled out a huge stock-buyback plan.
The upside surprise marked H-P's fifth consecutive earnings beat on CEO Mark Hurd's watch. Analysts said investors were tasting the fruit of Hurd's frenzied pruning of the company's once-overgrown bureaucracy.
"Despite Thursday's likely strength, we would be buyers of the shares," wrote Citigroup analyst Richard Gardner, who upgraded the stock to buy from hold. Credit Suisse First Boston, which like Citi makes a market and does work for H-P, crowned H-P the "undisputed heavyweight champion of hardware."
Given the woeful state of many of H-P's hardware competitors, that title may not carry all that much prestige. And with revenue growth slowing on a constant currency basis to 6% in the third quarter from 8% in the second quarter, some investors wondered how H-P can sustain its earnings growth.
But Hurd won over skeptics by promising to keep costs down, feeding the gains that saw operating margins expand in all businesses last quarter save one.
"We'll never be done looking at our cost structure," Hurd said on a postclose conference call. Shares rose $1.42 Thursday to $35.85 after earlier trading as high as $36.73.
One matter that remains unclear is at what point the cutbacks might start to yield diminishing returns.
H-P announced plans in July to shrink its worldwide office space, and the company is on track to wrap up its 10% headcount reduction in the current quarter.
But the answer to that riddle may depend on how bloated one believes H-P had become prior to its year-old turnaround.
Citigroup's Gardner, for one, sees room for an additional $1 billion to $2 billion in cost savings over two years, through tweaks in H-P's information technology, procurement and real estate.
In any case, H-P's cutback have clearly given it an edge in certain markets -- particularly the PC market, which accounts for nearly a third of revenue.
While the fiscal third quarter is seasonally H-P's weakest period, PC revenue rose 8% on a 14% rise in shipments. PC business operating margin jumped to 4% from 2.6% in the third quarter of 2005.
The increasing profitability offers a sharp contrast to rival
, which has blamed tough pricing for a series of earnings disappointments.
H-P cites its focus on the "sweet spots" of the PC market: consumer, mobility and emerging markets. Those are areas where some analyst say Dell is not as strong as it could be.
In some sense, H-P appears to be beating Dell at its own game, focusing on driving down procurement costs throughout its supply chain and leveraging savings from its internal cost-cutting efforts to wage price wars with its rivals.
Third-quarter results "reinforced the view that HPQ is now in a position to drive growth via price reductions and simultaneously expand margins," said Moors & Cabot analyst Cindy Shaw in a note to investors. Moors & Cabot doesn't have any business relationships with H-P.
"In our view," continued Shaw, "HPQ has gone from having a tough time keeping up with a constantly moving competitive bar to now being a key driver of movement in that competitive bar."