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Dow-30 component Hewlett-Packard (HPQ – Free Hewlett-Packard Stock Report), the giant technology company, took investors on a roller coaster ride on Thursday before it reported July-period results. The stock, which had been down as much as 8% early in the day, surged nearly 14% after reports (which were later confirmed by the company) that it was considering spinning off its personal computer operations and was in discussions to buy Autonomy, an enterprise software provider based in the U.K. H-P shares eventually ended the day down 6%, but fell another 23% in early Friday morning trading.

Late Thursday, the company reported earnings of $0.93 a share for the fiscal third quarter (ended July 31st). Sales rose 1.5% (but declined slightly adjusted for currency fluctuations), with increases in all of H-P's divisions except personal computers and printers. The gross margin contracted 70 basis points year to year, reflecting margin pressure in printing, services, and webOS software, partly offset by favorable commodity prices in personal computers and enterprise servers, storage systems, and networking. A 12% decline in the share count, reflecting the buyback of 128 million shares of stock, enhanced earnings per share.

Meanwhile, the plan to explore strategic alternatives for the personal computer business, including a spinoff or sale, and the proposed acquisition of Autonomy are parts of the company's transformation program. Sales of H-P's recently launched tablet computer, the TouchPad, have been disappointing, as have its notebook and desktop sales (the latter two, down 4% in the July quarter). The business faces growing competition, particularly from Apple's (AAPL) iPhone, and the environment for consumer spending is challenging. The TouchPad uses webOS software acquired when H-P bought Palm. H-P is exploring new uses for the software, which appears to have been well-received by software developers.

H-P also intends to sharpen its focus on its strong printing hardware, software, and services operations; concentrate on the enterprise, government, and commercial markets; and invest in rapidly growing areas, like cloud computing and analytics. It also plans to address several challenges, including the effects of the natural disasters in Japan on the printer business.

In all, H-P expects October-period sales to be hurt by the tough economic climate, higher channel inventory in printing supplies, and weak margins in the services business. The company intends to take a $1 billion cash charge for restructuring and shutdown costs related to webOS devices in the October period. It also may need to take a charge for goodwill impairment, and expects to incur $300 million-$400 million of expenses related to the cost of British pound options that H-P is buying to hedge the purchase price of Autonomy. Including these items, management looks for earnings per share of only $0.44-$0.55 in the October period, and full fiscal 2011 share net of $3.59-$3.70. We have lowered our fiscal 2011 estimate accordingly, to $3.60 a share, from $4.25.

Prospects for 2012 are very hazy. Evaluating options for the personal computer business, which had sales of $9.6 billion in the July interim, is expected to take 12-18 months. And although Autonomy is a very profitable company, with gross margins in the high 80% area, the acquisition, to be completed by the end of calendar 2011, will be expensive, at over ten times revenue. Moreover, the economic climate probably will remain challenging over the next few quarters. We are tentatively reducing our fiscal 2012 share-earnings forecast to $4.00, from $4.60, but this number is subject to revision if and when H-P sells the personal computer operation. Note, also, that the company no longer is targeting earnings of $7.00 a share by 2014. Although the stock's pullback creates a possible good entry point for long-term investors, H-P's 3- to 5-year earnings and stock price appreciation potential aren't well defined, since the company's recovery probably will be a protracted process. Most investors may want to stay on the sidelines for now.

About The CompanyHewlett-Packard provides computing and imaging solutions and services to consumers and businesses. The company operates in six segments: Imaging & Printing (20% of 2010 revenue), Personal Systems, (32%), Enterprise Storage & Servers (15%), Services, (27%), Financing (3%), and Software, (3%). Research and development costs amounted to 2.3% of 2010 revenue.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.