HP Earnings: How Much Will "Hurt" From Economy?

AP Hewlett Packard

SAN JOSE, Calif. - Technology company Hewlett-Packard Co. is scheduled to report fiscal fourth-quarter earnings after the market closes Monday. Below is a summary of key developments and analyst opinion about the period.

OVERVIEW: Faced with a sharply falling stock price, tech bellwether HP tried to reassure Wall Street by preannouncing better-than-expected fourth-quarter earnings and 2009 guidance.

The announcement, coming a week ahead of HP's scheduled earnings release Monday, was a bright spot for Silicon Valley, which is reeling from layoffs at Yahoo Inc. and Sun Microsystems Inc. and gloomy forecasts from chip maker Intel Corp. and Cisco Systems Inc. Rival computer-maker Dell Inc. also reported falling profit and sales.

HP's announcement succeeded in stopping the decline in HP's shares, but has not been enough to lift the stock back to its levels from September, when the financial crisis worsened and stocks tanked.

Fears still persist about HP's heavy exposure to slumping hardware sales industrywide. More than half of Palo Alto, Calif.-based HP's $104 billion in revenue last year came from sales of personal computers and servers and storage machines—the same equipment many companies and consumers are now buying less of because of the economic downturn.

The company's pot of gold remains its ink business, a steady source of revenue because of the constant need to replenish printers and copiers with ink. That division contributes half of HP's entire operating profit.

Mark Hurd has proved a master cost-cutter in three years as CEO of HP, a skill that has helped the company meet Wall Street's expectations while competitors are falling short of theirs. He's overseeing a monster restructuring now as HP integrates a $13.9 billion trophy: Electronic Data Systems Corp., which HP acquired to challenge IBM Corp. for technology services contracts such as outsourcing or data-center management.

HP is cutting 24,600 jobs over the next three years, nearly 8 percent of HP's 320,000-employee work force. Most of those cuts are coming from EDS.

BY THE NUMBERS: Analysts surveyed by Thomson Reuters expect HP to earn $1.01 per share on $33.3 billion in sales for the fourth quarter. HP said in its preannouncement that profit excluding items was $1.03 per share and sales were $33.6 billion.

ANALYST TAKE: Thomas Weisel Partners analyst Doug Reid wrote in a recent note to analyst that his firm is "incrementally more positive" about HP's shares but added that the severity of the economic downturn isn't fully known and could hurt HP worse than it anticipates.

"(W)e continue to see that significant downside risks remain as the full impact of a slowing global economy on HPQ's business remains unclear," Reid wrote.

He believes most of the weakness will come from hardware sales, though software, services and supplies are likely to be hurt less by the economic slowdown. Reid added that his firm sees "increased risk that HPQ's cost cutting measures will not keep pace with declining global demand for IT products in" 2009.

• "Fast Money": Pops & Drops: Hewlett-Packard, JP Morgan & Air Wagoner

WHAT'S AHEAD: HP was tightlipped about specifics about the fourth quarter in its earnings announcement. One of the reasons the stock hasn't rebounded more is investors don't know much about deeply HP's business has been hurt by the downturn, and how much of its results can be attributed to cost-cutting. Investors will be looking closely for those details when HP reports its full fourth-quarter results.

Wall Street also will be scrutinizing HP's reasoning behind its 2009 outlook. Investors already assume that information-technology spending will slump in 2009. Market research firm IDC recently cut its prediction for growth in worldwide IT spending to 2.6 percent in 2009, down from an earlier forecast of a 5.9 percent increase.

• Obama Warns On Economy: Works On Stimulus Plan

What many will be looking for Monday from HP are signs that HP isn't just cost-cutting its way out of what almost certainly a recession in the U.S. economy. Two-thirds of HP's sales come outside the U.S., but the ripple effects of the slowdown here are causing problems in other countries as well. Investors will be trying to gauge how well HP expects its business to hold up in the coming year and how seriously the company expects the downturn to hurt its sales.

STOCK PERFORMANCE: HP shares were trading near $50 per share in September before falling off dramatically because of the financial crisis. The stock fell 42 percent to its lowest point in two years on Nov. 13, when it hit $28.23 per share. The stock jumped nearly 20 percent after the early earnings announcement.

© 2009 CNBC.com