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Dow 30 Earnings: Hewlett-Packard - Fiscal First Quarter 2012
Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report), a global provider of computer hardware, software, and services, has turned in another weak performance in the January quarter. It also gave a guarded forecast for earnings over the balance of fiscal 2012 (ends October 31st). But Meg Whitman, the company's chief executive officer of six months, provided a little more information regarding plans to turn the company around. The stock retreated sharply in early morning trading following the release, as investors apparently focused on HPQ's difficult near-term earnings outlook.
The company reported earnings of $0.73 a share in the January quarter, well ahead of the $0.61-$0.64 that it had forecast in November and our estimate of $0.61, but 38% below the $1.17 a share that it earned in the year-earlier period. Reported results in both years included $0.19 a share of intangibles, restructuring, and acquisition costs.
Sales of $30 billion were down 7%, year to year, with more than half of the decline attributable to a shortage of hard disk drives due to the flooding last fall in Thailand. The shortage hurt sales in all regions and was most destructive in HPQ's Personal Systems Group and the Enterprise Server, Storage, and Networking business (the industry-standard server line), which experienced top-line declines of 10% and 15%, respectively.
Due to the shortage, the company focused on improving profits rather than shipment volumes and market share. Even though it lowered expenses, the gross margin was pressured by the relatively strong yen, a lower mix of ink supplies in the Imaging and Printing business, competitive pricing in HPQ's computer hardware markets, and additional head count in the Services business. Operating expenses rose 6%, but would have been flat absent real estate gains booked in the year-earlier period. The tax rate declined slightly and stock repurchases (29 million shares in the quarter) modestly enhanced earnings per share.
Looking ahead, management remains cautious regarding the outlook for both consumer and commercial spending. It also expects the hard disk drive shortage to continue to hurt sales in the April quarter, though to a lesser extent than in the period just past. It believes that pricing will remain very competitive; the enterprise mix will be hurt by lower sales of business-critical systems; and the pressure on services margins will continue. In all, it looks for earnings of $0.68-$0.71 a share in the April quarter, slightly short of our previous estimate of $0.75. The company still expects to earn at least $3.20 a share in fiscal 2012, but we think it will have to push hard in the second half to reach that number. Consequently, we have lowered our share-net estimate for fiscal 2012 from $3.20, to $3.00. Our initial earnings forecast for fiscal 2013, when we look for hard disk drive supplies to improve, is for an 8% increase, to about $3.35 a share.
Meanwhile, the company provided a broad outline of the work it needs to do in order to turn itself around. It intends to improve its execution, which includes increasing productivity and reducing complexity in the way it designs, manufactures, and delivers products. This should help lower costs, which in turn ought to permit the increased investment in its businesses needed for the company to remain competitive and to move into emerging areas, like cloud computing and information security. But management indicated that the company had only started on its journey and has a long road ahead of it. Although the stock's recovery potential over the pull to 2015-2017 is compelling, long-term investors in HPQ shares will probably need to be very patient.
About The Company: Hewlett-Packard provides computing and imaging solutions and services to consumers and businesses. The company operates in six segments: Imaging & Printing (20% of 2011 revenues), Personal Systems, (30%), Enterprise Storage & Servers (17%), Services, (27%), Financing (3%), and Software, (3%). Research and development costs amounted to 2.6% of 2011 revenues.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.