*NEWS*WILL THE STREET SHOW LOVE TO HP ?

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*NEWS*WILL THE STREET SHOW LOVE TO HP ?

 user 2006-02-15 at 10:19:00 am Views: 43
  • #14065

    Will the Street show love to HP?
    HP has enjoyed rising earnings and better margins with its new CEO, but some say it’s got a long way to go.
    February 
    2006: NEW YORK  – Wall Street analysts and investors have showered
    Hewlett-Packard with affection since Mark Hurd took over as CEO last
    year. Will the love affair continue?
    At least for now, the answer is
    likely yes. As with the last several quarters, analysts and investors
    expect the company to meet revenue expectations but deliver an upside
    surprise when it reports its fiscal first-quarter earnings after the
    closing bell Wednesday. Wall Street analysts expectHP (up $0.75 to
    $32.49, Research) to report sales of $22.5 billion and earnings per
    share of 44 cents a share, according to a Thomson/FirstCall survey.
    HP’s
    earnings surprises have pleased the company’s followers, who are
    clearly happy with Hurd’s moves to cut costs and restructure the
    company, including announced plans to lay off some 15,000 workers. The
    company’s stock rose 38 percent last year.
    But for some analysts,
    the honeymoon is over. While margins have improved and earnings have
    grown under Hurd, these analysts say he’s got some problems to address.
    For
    one, profit margins in HP’s printer business, the crown jewel of HP’s
    businesses, are falling. HP’s printing business comprises between 50
    percent and 60 percent of the company’s bottom-line earnings, depending
    on the quarter, according to Shaw Wu, an analyst with American
    Technology Research.
    That number is down from when Carly Fiorina was
    CEO and margins were in the 70s, he said. The drop is in part because
    margins in other divisions have risen, but it’s also because
    profitability has declined in the printing business, Wu said. Neither
    he nor his firm own shares of HP.
    Wu is concerned that the industry
    is shifting toward laser printers and away from inkjets. HP makes more
    money on inkjet printers than laser printers because it holds more
    patents related to inkjet printers, and also because consumers have to
    replace inkjet cartridges more often, he said.
    Wu estimates that 70
    percent of the printer division’s sales come from selling things like
    toner and ink cartridges. As Wu points out, that’s huge.
    “Potentially 35 percent, 40 percent of the company is selling cartridges,” he said.
    Momin
    Khan, an analyst with research firm Technology Business Research, said
    HP is losing market share in the printer market to Dell (up $0.43 to
    $32.00, Research), particularly with its inkjet and “all-in-one”
    printers. Khan said that HP will need to increase efficiencies to
    compete with Dell in this area. (Neither Khan nor his firm own shares
    of HP or Dell.)
    But he added that both face a major new threat in
    the form of “ink refillers” that refill ink and toner cartridges for
    roughly 40 percent less than the cost of a new Dell or HP cartridge.
    Walgreens, the drugstore chain that currently boasts 5,000 retail
    outlets in the U.S. and Puerto Rico, is offering ink refiller stations
    in some of its retail stores.
    Margins down for printers, but up elsewhere
    While
    it faces challenges in its biggest division, HP is starting to realize
    some competitive advantages over rivals in other areas, however.
    For
    one, unlike Dell, the company is not tied to using chips from Intel.
    According to Romeo Dator, co-manager of the All-American Equity Fund
    from U.S. Global Investors, HP is benefiting from the fact that it uses
    AMD (up $1.26 to $40.22, Research) chips in some of its laptop
    computers and servers, and AMD has gained market share from Intel (up
    $0.24 to $21.37, Research) in these areas. Dator’s fund owns a small
    position in HP.
    “We have heard stories where salespeople from Dell
    have said, ‘We can’t compete (on) selling servers; the customer wants
    AMD’,” said Dator, who thinks HP will enjoy this advantage for the
    foreseeable future.
    Cindy Shaw, an analyst with Moors & Cabot,
    said that while the company’s printing business is going through a
    “reset” period of investing to reinvigorate growth, margins have
    improved dramatically in other areas.
    “The top line growth hasn’t
    been stunning but the margin improvement has been stunning,” said Shaw,
    who does not own shares of HP. Shaw noted that last quarter, the
    company’s PC division, which accounts for 30 percent of revenue,
    boosted operating margins to 2.8 percent, up from 1.2 percent in the
    year-ago quarter. Operating margins in HP’s servers and storage
    business rose to 9.1 percent – versus 2.9 percent in the year-ago
    quarter.
    Also, the company announced plans yesterday to split off
    its hand-held device business from its PC business, in a move to help
    it profit from the boom in cell phones that double as PDAs.
    What’s next for HP?
    Shaw
    is bullish on HP, in part because she believes that not only is the
    company improving execution and margin across the board, she feels HP
    hasn’t begun to realize the economic benefits of restructuring, in part
    because the layoffs have not been completed.
    But American
    Technology’s Wu thinks most of the restructuring benefits have been
    priced into the stock already, and he’s concerned about the company’s
    long-term growth prospects.
    “At the end of the day, what is their
    real growth longer term? It’s probably between 5 and 10 percent. It’s
    hard to pay more than 15 multiple on that,” he said. HP currently
    trades at about 17.5 times estimated 2006 earnings.
    He is also
    concerned about the $1.1 billion charge the company took last quarter
    for restructuring costs. While many analysts feel those charges are to
    be expected, Wu is concerned that it makes expenses look artificially
    low.
    Both bulls and bears say that while they are impressed with
    Hurd’s performance so far, the company needs to articulate its
    long-term strategy, and soon.
    “There has to be more to it than just
    being five different businesses under one corporate moniker,” said
    Chirag Vasavada, a hardware analyst for money management firm T. Rowe
    Price, which owns shares of HP. “The larger question is, with global
    GDP growing at 4 to 5 percent and IT spending that’s growing a little
    faster than that, will HP be a share gainer, a share maintainer or a
    share loser? That’s the question that investors are going to look to
    Mark Hurd and his team to articulate