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Why HP Couldn't Move the Market

by: Trade Radar Operator August 21, 2008 | about stocks: HPQ    
Trade Radar Operator

Trade Radar Operator

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Hewlett-Packard (HPQ) was unable to rescue the stock market yesterday. Though major averages finished with gains after two down days, the tech-heavy NASDAQ was not able to rally to any significant extent. What happened?

H-P, IBM (IBM), Cisco (CSCO) and Oracle (ORCL), as the three-hundred-pound gorillas of the U.S. tech industry, are often able to move markets when they release earnings. This always frustrates me as these four companies are hardly representative of the hundreds of small and mid-size companies that make up a large part of the tech universe.

Not to disparage the company, H-P's numbers were very good. For its third quarter, earnings rose 11% from a year ago as sales reached $28 billion. That's serious money.

It's worth looking at the company's main lines of business to get a true read on how HP is doing.

PCs: Personal computer sales rose 15% from a year ago to $10.3 billion, with notebook revenue up 26% and desktop sales rising by 6%. Operating profit was $587 million.

Comment: notebooks are hot and the company is standing up to Dell while making good progress internationally. Great revenue number but, as is typical in the PC industry, that profit margin of 5.6% is no great shakes.

Printers:

Imaging and printing revenue was up 3% to $7 billion, and the division reported an operating profit of $1 billion. Printing supplies led the growth, as sales rose 11% from a year ago.



Comment: hmmm. A former strongly performing business, currently undergoing job cuts. Separating the selling of replacement cartridges and other supplies, one could draw the conclusion that the hardware part of the business saw shrinking sales. Indeed, consumer printing product sales fell a big 14%.

Storage & Servers:

Enterprise storage and servers sales rose 5% to $4.7 billion,



Comment: no individual consumer demand taints this line of business. The conclusion is that businesses are buying but they aren't buying much.

Software:

The software business reported a 29% increase in revenue to $781 million.



Comment: great growth number but this is H-P's smallest division

So it appears that things were good at HP but not all that good. What its results say about industry trends may be good for some tech companies but certainly not for all tech companies. The enterprise segment is seeing slow growth while personal computers is seeing strong growth. One could extrapolate from this that those companies supplying parts for personal computers or selling personal computers are in good shape. Those companies in the enterprise technology sector may see anemic growth.



Furthermore, revenue from overseas markets made up 68% of H-P's sales. That doesn't say much for growth in U.S. sales. And it raises a question mark as the dollar appreciates.



On the positive side, the company provided optimistic forward guidance for the next quarter. In addition, the services sector of the business turned in double digit growth. If H-P can effect the same kind of performance from their soon to close EDS acquisition, it will be good news indeed for the company.



After ruminating on these details, however, investors must have decided to return to a somewhat cautious stance on tech. And maybe that had something to do with why the company, though tacking on a nice enough gain itself, was not able to move the market today.



Disclosure:

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