Arik Hesseldahl

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HP and Dell Go in Opposite Directions After Earnings Reports

Shares in Hewlett-Packard had another rough day, falling 42 cents, or more than 1 percent, to close at $36.49 a day after it reported earnings that met expectations but offered disappointing outlook for the quarter and the year.

Shares in rival Dell, on the other hand, had a pretty good day, surging 85 cents, or more than 5 percent, to close at $16.75 after its earnings showed some progress in its long sought turnaround.

While HP suffered from consumer PC sales that fell by 23 percent, CEO Léo Apotheker also complained about weak profit margins in HP’s services group, promised to fix that and essentially blamed former CEO Mark Hurd for “failing to execute in the past.”

The services story was completely the opposite at Dell. Its acquisition of Perot Systems two years ago, for instance, has propelled its services business toward higher margins.

Analysts wasted no time issuing a barrage of downgrades on HP and upgrades on Dell.

“Time for the Tomfoolery to end,” was the subtitle of a research note from Brian Marshall at Gleacher and Co.

“Historically known for its consistent performance and operational excellence, HP is now associated with more undesirable attributes,” including management changes, lowering of guidance, and internal leaks, he wrote. “In our view, the investment community holds sacrosanct both consistency and lack of surprises from its portfolio companies. Unfortunately HPQ is delivering neither currently, resulting in roughly a 50% discount to the S&P 500.” A stinging rebuke, indeed, though Marshall maintained a Buy rating on HP shares, based on the price, but lowered his target price to $50 from $54.

Deutsche Bank analyst Chris Whitmore, who earlier in the week had been relatively bullish on both HP and Dell, took down his price target on HP to $36 from $40 and reduced his forecasts to reflect its new guidance. There will be, he wrote in a research note to clients issued today, “no quick fix” to HP’s services business. Its plans to hire a new head of services and to invest in more profitable offerings will take 12 to 24 months if not longer. “In the interim, we expect growth and margins to remain under pressure.”

Robert Cihra of Caris and Co. cut his rating on HP to “below average” from average and worried about its long-term financial guidance. He slashed his forecasts, and now predicts HP’s profits to grow only 2 percent in fiscal year 2012. Much of HP’s per-share earnings, he says, came from share buybacks, something he thinks HP should stop doing in order to preserve cash for acquisitions. Its balance sheet currently shows about $12.7 billion in cash and cash equivalents.

Compare these to some of the comments on Dell.

Andy Hargreaves of Pacific Crest Securities wrote in a note to clients that Dell’s gross product margins are higher now than at any time since 1994, this despite lousy consumer demand for PCs and friction around sales of storage products that caused revenue, at $15 billion, to fall a little short of his $15.6 billion estimate. “Dell’s management has shown considerable dedication to its pricing controls and supply-chain management,” he wrote.

Shaw Wu of Sterne Agee applauded Dell for the unexpectedly strong results, but not without reservations. “As much as we would like to join the bull bandwagon, three issues surrounding its big gross margin upside give us hesitation,” he wrote in a note to clients today.

First, Dell’s comment that the strength in enterprise was a key reason for the upside–enterprise amounted to only 30 percent of sales, up only slightly from 28 percent a year ago. Second, prices on hard drives and displays have been rising recently, and historically, Dell’s gross profit margins have been tied closely to the cost of the components it buys, so he wonders why that’s not the case now. Third, Dell’s overall gross margin of 23.2 percent is as close as it has ever been in recent memory to HP’s recent gross margin high of 24.6 percent, and yet their product mix is as different as night and day. Dell’s business is about 70 percent PCs and 30 percent enterprise, while it’s more or less the opposite at HP. The concerns led Wu to rate Dell “neutral,” saying, “We remain concerned with the company’s longer-term fundamental position and believe the company needs to take more aggressive steps to reinvent itself.”


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— Om Malik on Bloomberg TV, talking about Yahoo, the September issue of Vogue Magazine, and our overdependence on Google