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Dow-30 Earnings: Hewlett-Packard - Fiscal Third Quarter 2012
Hewlett-Packard (HPQ - Free HP Stock Report), a diversified computing company and a component of the Dow 30, reported a steep loss for its third fiscal quarter and discussed prospects for the difficult year ahead. Although the loss wasn't a surprise, having been pre-announced by management on August 8th, investors responded negatively to H-P's cautious outlook, and sent the shares down more than 6% in early Thursday morning trading – to within less than $0.30 a share of a new 52 week low.
In its July quarter, H-P reported a loss of $4.49 a share compared with earnings of $0.93 a share in the year-earlier period and our original estimate of a $0.02-a-share profit, before the pre-announcement. This quarter's large loss included $5.49 a share of various charges, among them for H-P's restructuring program, for the winddown of certain retail publishing business activities, and for writedowns in H-P's services segment and of the Compaq name. Without the charges, it would have earned $1.00 a share in its third fiscal quarter, slightly ahead of the forecast of $0.94-$0.97 provided at the time of its April-period report, but below the $1.10 (before $0.17 a share of acquisitions and other so-called nonoperating costs) logged in the comparable period of last year.
The company's sales declined 5% in the quarter and were down 2% in constant currency. Sales in the Americas region were also off 5%; Europe/Middle East/Africa fell 4%; Asia/Pacific was down 7%. The United States accounted for only 36% of sales.
Most of H-P's business groups reported top-line declines, the largest of which was a 10% falloff in personal systems sales. That business has been hurt by the shift in consumer preferences to tablet computers, weak economic activity worldwide, competition in Asia, and no doubt by customers delaying computer purchases in advance of the release of Microsoft's new Windows 8 operating system this fall.
Meanwhile, sales in the services and imaging/printing groups both fell 3%, and enterprise servers, storage and networking sales were down 4%. The software business was the only one to report a sales increase, up 18%, partly supported by last fall's acquisition of Autonomy. Revenue at H-P financial services was flat. Margins contracted in all but the imaging/printing and financial services segments.
Management also discussed prospects for the tough year ahead. The turnaround in the enterprise services business probably will take a few years, and progress may be uneven. In addition to management changes, the group is focusing on improving the margins of both new accounts and contract renewals.
The outlook for the personal systems business is very difficult, given the continued weak demand for personal computers, intense competition, and currently high channel inventories across the industry. H-P is launching targeted marketing programs to support the business in the October period.
Elsewhere, H-P has taken a number of measures to fix problems at the Autonomy (software) business, including to make its results more predictable and to improve customer satisfaction. A new head of the software division also has been installed. Companywide, H-P now expects to shed about 11.500 employees in fiscal 2012 (which ends on October 31st), compared with its prior estimate of 9,000, which should help reduce costs.
In all, H-P expects to report a fiscal 2012 loss of $2.23-$2.25 a share compared with our original estimate of a profit of $2.25. At the time of the pre-announcement, we had revised our estimate to a loss of $2.20 a share, but are now raising that figure by a nickel, to a deficit of $2.25. In fiscal 2013, we expect the personal computer business to struggle, but the July-quarter writeoffs should clear the decks for a better year, and the company ought to make some progress in its turnaround efforts. Although we remain cautious regarding the company's prospects, we are tentatively raising our share-net estimate for fiscal 2013, from $2.90 a share to $3.20.
Hewlett-Packard stock has better-than-average comeback potential to mid-decade. But with the company still in the early stages of its recovery, and given the very difficult operating climate, all but very patient, aggressive investors may want to defer commitments for the time being.
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.