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Vindication For Hewlett Packard

Posted: Feb 22, 2008 08:53 AM by Wayne Pinsent

Tickers in this Article: HPQ, CSCO, APPL, IBM, MSFT

The market has certainly not been indicating a clear direction lately. A lot of the economic data has been less than encouraging, but there are still a healthy number of companies that are reporting profit ahead of expectations. On Wednesday, California-based Hewlett Packard (NYSE:HPQ) reported a 38% rise in profit for its fiscal first quarter and raised its guidance for the year.

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The computer manufacturer is considered a technology bellwether, and its quarter is a positive sign for the industry.

Worries Overblown
Shares of Hewlett Packard (HP) rose 7.9%, or $3.49, to $47.44 after the company reported an impressive quarter. For the three months ended January 31, 2008, the company earned $2.13 billion (80 cents per share) compared with $1.55 billion (55 cents per share) a year earlier. Not taking into consideration charges from prior acquisitions, HP earned 86 cents per share, which exceeded consensus estimates of 81 cents. The company performed well on the top line also, with revenue up 13% to $28.47 billion, beating analyst estimates of $27.6 billion.

The quarter is a vindication and proof the market overreacted with this stock on the heels of worries coming from companies like Cisco (Nasdaq:CSCO) and Apple (Nasdaq:AAPL). The stock, despite Wednesday's 7.9% rise, is still down 5.8% since the start of the year. Normally after a big one day jump, I would stay away from the stock, but HP was oversold.

The market took some bad news and blew it out of proportion, lowering expectations and the shares in the process, instead of looking at the positive news being reported by companies like IBM (NYSE:IBM) and Microsoft (Nasdaq:MSFT). HP's report reinforces the good news from these last two companies, especially in the case of Microsoft which has its software packed into HP computers.

Strong Management Continues
CEO Mark Hurd has done a truly amazing job since taking the reins. Since 2005, when he took over, the stock price has doubled and the company has beat earnings expectations every single quarter. The company has been doing well and is looking to continue that streak as it guided up along with the impressive results. For its fiscal 2008, which ends October 31, the company now expects to earn $3.50-3.54 per share, up from its previous estimate of $3.32-3.37. This also far outstrips previous consensus analyst expectations of $3.36 per share.

There still are concerns, as the economic data keeps coming in, and a slowing in the economy would certainly bring a slowdown to HP's sales. HP's management has helped calm some of those fears. Concerns over the economy were present in HP's press release, but still management guided higher. Hurd is a smart man, and I doubt he would let the guidance get anywhere out of reach in this environment. (For added insight, see Evaluating A Company's Management and Get Tough On Management Puff.)

The Bottom Line
Hewlett Packard reported a solid quarter where it beat expectations on both the bottom and top lines. Management also raised guidance, which was a healthy sign after some not so enthusiastic reports from other tech companies. HP has been a continued strong performer and is led by smart management. I think the stock's previous downturn was unwarranted, and it now looks like a solid investment.

By Wayne Pinsent

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