The Pressure’s on Hewlett-Packard as It Reports Earnings Today
HP shares have been bashed about in recent days, in no small part because of the dismal revenue outlook issued by rival Dell on Tuesday, and also on the heels of a downgrade by BMO Capital analyst Keith Bachman. Word that the TouchPad tablet isn’t selling well at Best Buy didn’t help. Dell shares gave up more than 10 percent of their value, and HP shares appeared to fall in sympathy by nearly four percent, closing at $31.39, or more than 36 percent off their 52-week peak.
So, what to expect? More lowered estimates, if Bachman is to be believed. In a note to clients Wednesday, Bachman cut his rating on HP to “market perform” from “outperform,” even though HP is trading at an inexpensive valuation. “Poor execution, low revenue growth and negative operating income growth” have caused him to slash his price target on HP to $36 from $43.
Bachman said he expects HP to fall short on PC sales, which may cause it to miss its previously issued revenue guidance. “We think HP will modestly miss July top-line estimates, and more meaningfully miss current top-line estimates for HP’s October quarter,” he wrote.
The consensus view of analysts calls for HP to report per-share earnings of $1.09 on revenue of $31.2 billion.
Chris Whitmore, an analyst at Deutsche Bank, wasn’t quite so dour as Bachman, though he wasn’t exactly whistling Dixie about HP’s prospects, either. Saying he expects HP to report results that are in line with the consensus expectations, Whitmore wrote in an Aug. 14 note to clients that he sees a “modest risk to revenue expectations.” The continuing investment to beef up HP’s investment in the services business will put some pressure on future earnings potential, Whitmore worries.
Citing checks of HP’s supply chain and distribution channel, Shaw Wu of Sterne Agee said in a note to clients yesterday that he thinks HP will “meet or exceed” the consensus estimates, and that, as in recent quarters, enterprise hardware sales will be stronger than consumer PC and device sales. “We believe this favorable product mix, in addition to lower component costs, should benefit gross margin,” he wrote. At least there’s one vote of confidence.
Back to services for a moment. HP’s long-term strategy has been to transform itself into a bigger player in IT services, so that it can rely less on sales of personal computers and printers, both of which are subject to violent sales-cycle swings. It’s a strategy that worked out well for IBM, and the $14 billion acquisition of EDS in 2008 was a key part of it.
During HP’s last earnings call in May, Apotheker grumbled that under previous CEO Mark Hurd, now a president at Oracle, HP “over-executed operationally and under-invested strategically.” Essentially, Apotheker blamed Hurd — known as an aggressive cost-cutter — for cutting too deeply without making sufficient investments to fuel growth in higher-profit lines of businesslike services. As a result, Apotheker explained, some expensive investments would be needed over the next several quarters to get that services business where it needs to be, and these investments would eat into results for the next several quarters. (You can hear him explain it himself in a CNBC video from May, below.)
It will be interesting to see if that “Hurd’s fault” narrative is still on the table. If it is, it’s not likely to fall on sympathetic ears. In his downgrade note, Bachman at BMO criticized HP harshly for pressing this message. “We suspect that management will make the point that previous management cut HP too much. However, previous management did not provide guidance, and then miss for three quarters, particularly right after having an analyst event. We would leave blaming the previous administration to politicians — it does not work with investors.” Ouch.