Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report) shares pulled back more than 13% in early Thursday morning trading after the diversified computer company (among the largest worldwide) and component of the Dow 30 reported soft July-quarter results and indicated that it didn't expect any sales growth in the new fiscal year, which begins on November 1st.
Reported earnings for the July term were $0.71 a share, above our estimate of $0.57, management's forecast of $0.56-$0.59, and the $4.49-a-share loss logged in the year-earlier period. The company owes its better-than-expected bottom-line results to lower-than-anticipated restructuring and acquisitions costs of only $0.15 a share, compared with HP's forecast in May of $0.28. Sales were slightly higher than our estimate, but were down 8% year to year.
Meg Whitman, HP's chief executive officer, indicated that, while the printing, enterprise services, storage, and software operations are making progress, industry-standard servers and personal computers have not yet turned the corner, and she announced several management changes to accelerate the turnaround.
Indeed, the software division was the only one to report a sales increase, albeit only a 1% rise, powered by a 4% gain in support revenues. Printing sales fell 4% due to lower supplies revenue, but the consumer and commercial printer units rose 2% and 12%, respectively, year to year, the first gain since 2011. On the other hand, enterprise products and services sales both fell 9%, and personal systems sales were down 11%, the latter reflecting competition from tablet computers and multi-function mobile phones. Although personal computer units fell 8%, notebook and desktop computer sales declined 16% and 10% respectively, reflecting intense price competition in the PC space, possibly aggravated by struggling rival PC maker Dell. HP indicated that the European market remains challenging, and demand in China is soft.
Meanwhile, although operating margins contracted in most of HP's business groups, they expanded a bit in enterprise services and software. Interest expenses also fell, as the company has reduced long-term debt by 21% since the start of fiscal 2013.
Looking ahead, the company expects the weakness in the consumer personal computer market to persist in the October quarter, and expects pricing pressure in printing, personal computers, and servers to continue. But it looks for the commercial portion of the personal computer business to do better than the consumer end. Management said it has more work to do to bring down channel inventory in printing, but expects the business to do fairly well. Contract runoffs will pressure enterprise services sales, though management now doesn't expect them to fall as much as it originally anticipated. Software faces a tough comparison in the October term due to a large deal from General Motors last year. And currency headwinds may persist in the final period of fiscal 2013. But HP hinted that it might ramp up share repurchases in the October quarter.
In sum, the company has raised its full-year fiscal 2013 earnings forecast slightly, from $2.50-$2.60 per share to $2.67-$2.71 a share. The estimate incorporates $0.86 a share of restructuring costs, down from HP's earlier expectation of $1.00 of such expenses. We are tentatively increasing our 2013 share-net call, from $2.50 a share to $2.70, which assumes share net of $0.81 in the October period, and now look for HP to earn $2.70 a share in fiscal 2014 on lower sales but better margins.
Hewlett-Packard is making slow progress, but its recovery remains a multi-year process. Prior to the recent pullback, the stock briefly touched a 12-month high, and the shares are still trading well above its levels at the start of fiscal 2013. Nonetheless, the issue has good, if not very well-defined, comeback potential to 2016-2018, and may appeal to investors who are both venturesome and 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 2012 revenues), Personal Systems, (29%), Enterprise Storage & Servers (17%), Services, (28%), Financing (3%), and Software, (3%).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.