HP Shares Surge as Forecast Tops Analysts' EstimatesAaron Ricadela
Hewlett-Packard Co., the largest personal-computer maker, surged the most in 11 years after its fiscal third-quarter profit forecast topped estimates as cost cuts help make up for slumping desktop and laptop demand.
The shares jumped 17 percent to $24.86 at the close in New York, the biggest gain since Nov. 6, 2001. The stock has gained 74 percent this year, compared with a 16 percent increase in the Standard & Poor’s 500 Index.
Chief Executive Officer Meg Whitman is eliminating 29,000 jobs through the end of fiscal 2014 to save as much as $3.5 billion a year and shore up profitability as PC demand ebbs. While Whitman cut costs by 8.8 percent and extracted more earnings from the printing business, she’ll need to reignite sales to ensure a turnaround takes hold, said Chris Bertelsen, chief investment officer at Global Financial Private Capital.
“They certainly seem to have stemmed the bleeding,” said Bertelsen, who is based in Sarasota, Florida, and manages about $2 billion. “If you can’t give me sales and growth, then it’s really hard to continue to engineer profits.”
Earnings excluding some items will be 84 cents to 87 cents a share in the period that ends in July, Palo Alto, California-based Hewlett-Packard said in a statement yesterday. That exceeded analysts’ average estimate for 83 cents in profit, according to data compiled by Bloomberg.
Fiscal second-quarter revenue declined 10 percent to $27.6 billion, shy of $28 billion projected by analysts. Sales declined across all of Hewlett-Packard’s divisions.
“We need to do a better job growing the top line,” Whitman said on conference call. “We have a shot at growth in 2014, but there’s no question there are headwinds.” At a meeting with investors last October, Whitman said next year would be one of “recovery and expansion.”
In another indication that lower costs are bolstering earnings, second-quarter profit excluding certain items was 87 cents a share, compared with 81 cents predicted by analysts.
“She clearly has the company focused on profit and cash flow and that’s coming through in the earnings,” said Shannon Cross, an analyst at Cross Research in Millburn, New Jersey, who rates the stock a hold. “It shows they’re able to drive margin at businesses that are under significant revenue pressure.”
Operating cash flow increased 44 percent to $3.6 billion and free cash flow almost doubled as capital expenditures fell.
“HP has value investors, and value investors care about cash flow,” Hewlett-Packard Chief Financial Officer Cathie Lesjak said in an interview.
Sales at the division that includes PCs tumbled 20 percent to $7.58 billion last quarter, adding to evidence that Hewlett-Packard is getting little relief from last year’s unveiling of Microsoft Corp.’s new Windows software. Industrywide, PC shipments plummeted 14 percent in the first quarter, the steepest decline since researcher IDC began tracking data in 1994.
Dell Inc., which is seeking to go private in a $24.4 billion deal, has been cutting PC prices to win market share, and has gained ground from Hewlett-Packard in servers.
“We expect Dell to get even more aggressive on pricing,” making it “very difficult for HP to compete,” Abhey Lamba, an analyst at Mizuho Securities USA Inc., said in a recent research note.
Net income for the second quarter fell 32 percent to $1.08 billion, or 55 cents a share.
Whitman said she wouldn’t get into a pricing war with Dell.
“You saw one of our competitors, Dell, completely crater their earnings,” said Whitman. “Maybe that’s what you do when you go private. We’re here to set this company up for the long term, not just get through this year.”
A 7-inch tablet computer selling for $170 that runs Google Inc.’s Android operating system has been able to plug a hole in the company’s lineup, she said. While Hewlett-Packard also sells a 10-inch tablet for businesses featuring Windows, companies are still “evaluating” it, Lesjak said.
The PC market slump steps up pressure on Whitman to boost sales of servers, data storage and networking equipment -- including new machines designed to conserve space and energy.
Whitman, the company’s fourth chief executive officer in three years, has been rolling out new products to revive growth after seven quarters of declining sales and profit.
“Meg’s regained some people’s confidence,” said Chris Whitmore, an analyst at Deutsche Bank AG in San Francisco who recommends selling the shares.
Operating margin in the printing division widened to 15.8 percent from 13.2 percent a year earlier, even as sales in the division slipped 1 percent. The company has been able to make ink more affordable in emerging markets and sell new high-end inkjet printers to businesses, Lesjak said.
Computer server, storage and networking-gear revenue declined 9.6 percent to $6.82 billion. Technology-services revenue fell 7.6 percent to $6 billion.
Hewlett-Packard is seeking to move past three years of management tumult -- including the departure of former CEOs Mark Hurd and Leo Apotheker -- and writedowns of acquisitions including Electronic Data Systems Corp., handheld-device maker Palm Inc. and software developer Autonomy Corp.
Ray Lane resigned as chairman last month after coming under fire from investors, who said management and the board failed to conduct the proper due diligence before buying Autonomy for $10.3 billion in 2011. Hewlett-Packard took an $8.8 billion charge for Autonomy in November.
The company, which hasn’t been acquisitive as it rebuilds its balance sheet, will make small software and cloud-computing deals, Whitman said.
While Whitman has said Hewlett-Packard can return to growth in fiscal 2014 after two years of declines, analysts are predicting a 1 percent drop in sales to $111 billion for that year, according to estimates compiled by Bloomberg.
“Meg has done an excellent job executing in what has been a difficult environment,” said Bill Kreher, an analyst at Edward Jones & Co. in Des Peres, Missouri. “The Street is giving them a pass on this year and perhaps even into next. But the market would like to see a return to growth in 2014.”