HP Comes in As Expected; Is It Time to Buy?

Hewlett Packard
Hewlett Packard

Hewlett-Packard let the wind out of its sails a couple of weeks ago when it essentially pre-announced earnings with news of the 3Com acquisition. But with Dell's lousy financial report last week, there was still a healthy amount of interest in how each HP unit performed, and whether guidance would hold up.

HP delivered .

The company came in as expected with $1.14 a share; there was a nice, $400 million upside surprise to the company's top line, and in an environment like this one, it might be an even bigger deal for the company to surprise on revenue than on profits. HP has made a mint through operational efficiencies and cutbacks so bottomline performance hasn't been all that surprising. But better-than-expected sales just two weeks after pre-announcing is a nice little bonus.

On a unit by unit basis, HP Services came in at $8.9 billion with operating margin of 16.2 percent, essentially in line; Enterprise Storage and Servers reached $4.2 billion with operating margin of 11.4 percent, both metrics slightly below expectations; HP Software was a nice surprise, reporting $967 million against the $950 million expected, and operating margin of almost 25 percent was much better than the 20.9 percent anticipated; the company's Personal Systems Group, home to HP's personal computers, reported $9.9 billion in revenue, which was in line, but its operating margin of 5.5 percent was much better than the 4.9 percent projected; Imaging and Printing actually beat expectations even amid continuing concerns of a slowdown there with $6.5 billion and 18.1 percent margins; and Financial Services came in at $726 million and 7.4 percent in operating margins, virtually in line with expectations.

Guidance for the company's first fiscal quarter and all of fiscal year 2010 was right in line with what the company pre-announced.

The company's CEO Mark Hurd, who appeared via phone exclusively on "Closing Bell" this evening, says Asia continues to perform and while he's happy with Europe's performance, he would still like to see ongoing improvement there before he calls a turnaround in that important market. He's also pleased with sales growth in the United States.

Earlier today, Gartner issued a report expecting 2 percent growth in personal computer sales this year to 298 million units on the backs of netbook popularity and the burgeoning corporate upgrade cycle because of the Microsoft Windows 7 release. Dell even referenced those trends last week and hopes to ride those coattails. But against the HP juggernaut in PCs, investors have to wonder just how effectively Dell will be able to compete.

Meantime, HP continues to trade at around 13x next year's earnings, and for a company that for the past five years has averaged 17x its next year's earnings, it would appear that the company is trading at a sizeable discount. Since the industry is on the lip of what could be a nice turnaround, along with the release of Win7, investors might want to take a close look at this company as a portfolio option. Shares are trading slightly lower on the release tonight, in a kind of sell-on-the-news event. HP continues to focus on servers, services and networking with its 3Com purchase, and that should serve as a warning shot across the bows of Cisco and IBM , themselves not standing still.

The enterprise upgrade cycle—and improving consumer spending trends—could be a one-two punch of rising tides, if you don't mind me mixing metaphors. Mark Hurd is in the driver's seat, and HP is a steamroller.

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