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H-P Gets Much Cheaper
Shares of Hewlett-Packard (HPQ:NYSE) were pummeled Thursday, losing Over 17% after the hardware giant blindsided Wall Street with news that its third- and fourth-quarter earnings would badly miss estimates because of problems in its server and storage division.
The stock was recently down $3.36 to $16.16.
In an announcement that stunned Wall Street, the Palo Alto, Calif., tech outfit confessed Thursday to a seven-cent earnings shortfall for the fiscal third quarter ended July 31, while forecasting an earnings miss that may be as wide as eight cents in the current quarter.
The timing of the news was in some ways as striking as the substance: Wall Street watchers sounded puzzled that H-P would chose to broadcast the huge shortfall on the same day rival Dell is expected — as usual — to meet or possibly even beat expectations in its latest quarter.
H-P said before the bell that it expects to earn 24 cents a share, excluding various expenses, on revenue of $18.9 billion, and between 35 cents and 39 cents a share on sales of $21 billion to $21.5 billion in the fourth quarter. The third-quarter revenue estimate represents 9% growth from the 2003 quarter.
Analysts surveyed by Thomson First Call had been forecasting earnings of 31 cents a share on revenue of $19.01 billion in the third quarter and earnings of 43 cents a share on revenue of $21.34 billion in the fourth.
While bad news, Hewlett-Packard's shortfall did not reflect significant weakness in any major consumer segment or its massively profitable printer division. Rather, the miss appeared entirely attributable to misjudgments in its division that sells powerful hardware arrays to business customers, a segment where Dell and IBM (IBM:NYSE) have been consistenly outgrowing H-P.
"Although we are satisfied with our performance in personal systems, imaging and printing, software and services, these solid results were overshadowed by unacceptable execution in enterprise servers and storage," the company said.
"The most disconcerting thing is that a number of groups at H-P are doing extremely well," said Alan Loewenstein, co-portfolio manager of the John Hancock Technology fund, which has a stake in H-P. "PCs, which are always subject to question, did well. Printers as usual did well. Services and software were starting to gain traction. But they were all pulled back by servers and storage."
He said he was surprised by how much of a hit H-P shares had taken, given that the stock was already far from expensive at yesterday's close of $19.52. "If it was at $25, I could understand a bigger decline," he said, noting that the company "pretty much executed" on the revenue side.
Loewenstein said he continues to regard H-P as a value play with "some growth on top of that, because if corporate spending is picking up then companies are probably buying some H-P PCs and printers. So it's value plus a play on the economic cycle." Plus, he noted H-P "still has a decent amount of cash and they're buying back stock and were cash-flow positive. So it's not like this totally destroyed the business."
Loewenstein's fund also has a holding in Dell, but he says he holds the two for completely different reasons: "One's value, one's growth," he said, referring to H-P and Dell, respectively.
But at Babson Capital, managing director Vinnie Muscolino said he has no interest in picking up H-P though he called the shares "dirt cheap." He prefers Dell.
"The reason why we're underweight H-P is that they don't have a competitive advantage in about half their revenue, which is basically the PC and enterprise server space. And now that Dell is embarking on an initiative to gain market share in the printer space that may cap their margin opportunity in printers," said Muscolino.
"In printers, Dell's got nothing to lose [and everything to gain] and in PCs, if they had to engage in more aggressive pricing, they have an 8% profit margin to work with. H-P has hardly any margin to work with."
"I think in general, H-P has a great printer business and a challenged enterprise hardware business," he summed up. "They're a weak competitor against EMC on storage and Dell in terms of profitability in industry-standard servers and PCs, so I think that finally came home to roost."
Chimed in Goldman Sachs' Laura Conigliaro, "Despite H-P's sharp downward move, we would not be rushing to buy. The call raised many additional questions about H-P's execution capability, an area that has already been something of a yellow flag for H-P. Although H-P provided targets of 35 cents to 39 cents for the October quarter, many of the issues that it is facing suggest that estimates should more prudently be, at best, at the lowest end of that range."
Commenting on the stunning miss, CEO Carly Fiorina promised "immediate management changes" and said the company would accelerate cost cuts in the server and storage unit.
Later in the day, H-P gave further details on the management shake-up. In an email sent to all H-P employees, Fiorina said Mike Winkler will replace Peter Blackmore as head of the Customer Solutions Group, H-P's enterprise, small and medium business and public sector division. Winkler will retain his former role as chief marketing officer.
Jack Novia will replace Jim Milton as CSG senior vice president and managing director for the Americas. Previously, Novia was senior vice president of the H-P technology solutions group. H-P also said Bernard Meric will take the place of Kasper Rorsted to head up the CSG group in the Europe, Middle East and Africa region. Meric had been senior vice president of HP's printer division in EMEA.
H-P's enterprise servers and storage division saw third-quarter revenue fall 5% from last year to $3.4 billion, reflecting, among other things, a 32% decline in Alpha server revenue, a 25% decline in nonstop server revenue, and an overall 15% plunge in storage revenue to $709 million. The company cited disruptions caused by implementation of new supply-chain software, "channel management" problems including overly aggressive discounting in Europe, and muted end-of-quarter order acceleration.
"The main concern from the report is that the CPQ merger seems to have helped H-P in 'profitless' PCs, but failed to deliver in the enterprise," said UBS analyst Ben Reitzes in a follow-up note this morning, adding that he's reviewing his profit estimates for both fiscal year '04 and '05 and his price target of $27.
In H-P's other segments, personal systems revenue rose 19% from a year ago to $5.9 billion, including a 26% rise in desktop revenue and a 12% jump in notebooks. Consumer revenue rose 19% while commercial revenue rose 20%. The personal systems unit swung to a $25 million profit in the quarter.
In imaging and printing, revenue rose 8% from a year ago to $5.6 billion, reflecting strong growth in business hardware and supplies. The division's operating profit was $837 million in the third quarter.
By region, revenue in the Americas grew 4% to $8.4 billion, Europe grew 14% to $7.5 billion, and Asia Pacific grew 11% to $3.0 billion.
* Post was edited: 2004-08-22 10:41:00
Author2013-06-21 at 10:34:28 am
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