HP Earnings Better Than Feared, but Still Not Great
Shares of Hewlett-Packard are rising by more than 5 percent in premarket trading this morning, following Thursday’s quarterly earnings report that blew right past the consensus. But HP is by no means anywhere near out of the wilderness in which it has languished for the last year and change.
Deutsche Bank analyst Chris Whitmore, in a note to clients this morning, gave credit where it was due, but maintained his “sell” rating on HP shares. For all the sunshine visible in HP’s results, the fundamentals remain weak. Better operating margins in printing, and a slower-than-expected bleed-off in services contracts helped. And the $2.6 billion in operating cash flow that was so helpful in paying down net debt? Half a billion of it came from a one-time tax benefit and lower bonus payments to employees in 2012, Whitmore writes. “Unfortunately, none of these items appear sustainable and underlying weakness persists across all HP’s major businesses,” he wrote.
While he raised his price target on HP shares to $12 from $10, Whitmore says there’s still no fundamental change in HP’s business to make him consider upgrading his rating: “We remain concerned about ongoing weak printer unit shipments and the structural decline of this market, ongoing deterioration across the PC industry on both a unit and pricing basis, poor bookings performance and future contract losses in Services, the ongoing rapid decline of high margin Enterprise products and the associated future high-margin Tech Services revenue run-off.”