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Hewlett-Packard (HPQ)
HP's Earnings Not Recession-Proof
Hewlett-Packard reported their Q1 profits yesterday after the markets closed. While the past two quarters have been upbeat and positive, it seems the recession has finally caught up. The Palo-Alto-based company reported a 13 percent decrease in profits and revised their 2009 guidance downwards. Total sales amounted to $28.8 billion, which missed analyst estimates by about $3 billion. As a result, its stock has been decreasing since after-hours trading Wednesday night. At the time that this was written, shares in HP were trading for $31.69, signaling a drop of 7 percent. How was the company able to avoid the recession in the previous quarters and what do they have planned for this current one?
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Factoring out decreasing demand with the advent of the financial crisis, it comes down to strategy and management. To illustrate, look at the company's acquisition of EDS. While this was a good strategic decision in theory, it was also a good move on the tech bellwether's part. Not only did it provide better opportunities for lucrative revenues from the business-consulting arena, but it also created a new avenue for growth. In reality, EDS generated more than a third of the company's profits. Revenue from the services segment reached $8.7 billion. The only other detail we have thus far is that integrating the two companies is running ahead of schedule. If all is so great, then why would CEO Mark Hurd refrain from sharing more details? Only HP knows the answer to that one. We can only speculate that it is because sensitive data is involved, or its somehow tied to more layoffs.
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While HP posted a decline in profits, they were still profitable. Other pc manufacturers seem to be struggling and are looking for new industries to expand into. For example, rumors run amuck on the internet that Dell (DELL: Charts, News, Offers) will be entering the cell phone manufacturing market. This came about when AT&T (T: Charts, News, Offers) Mobility CEO, Ralph de la Vega, stated unintentionally that the second-largest US pc manufacturer would be entering the smartphone market. Another example is Asus and Garmin (GRMN: Charts, News, Offers) who have already announced they would be working together to produce the Nuvifone. However, Sprint (S: Charts, News, Offers) posted their latest earnings today, and it seems like the telecommunications industry may be reaching maturity. Therefore, jumping into cell phone production may not be the best way to create shareholder wealth. HP probably knew this back in May when they decided they would rather spend money on a new company in a different industry than try their hand at telecom. Probably a good move but once again, too early to tell.
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Increasing revenues would be desirable, but Mr. Hurd felt that there is no large catalyst to spur growth. The only other way to boost profits is cutting expenses. As a result, investors are showing doubt on whether or not HP can post positive numbers for the next quarter. They have been cutting back on expenses and streamlining their corporate structure for years now, and they are starting to run out of things to cut back on. Still, Mr. Hurd stated he will take a 20 percent pay reduction, while other executives could face up to 15 percent. Other employees may see a 5 percent reduction. Other measures include the ban on purchasing discounted shares through the company's discount stock purchase program. However, the company promises that if its performance improves, then employees will receive bonuses in the future.
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Will all of this be enough to generate positive earnings? Maybe. There is no doubt that the company's operating margin was profitable across core businesses, but demand is still falling. HP has a challenging quarter ahead and while investors are dumping their shares, some analysts are maintaining their "buy" rating on the company. The data probably leans a bit more towards analysts than investors in this case, as investors are just reacting to the large headlines stating "HP Posts 13 Percent Decline." Still, it is hard to be optimistic when the CEO believes the economy will affect the company's bottom line.
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