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Investors have gotten caught up in the current turnaround at Hewlett-Packard (NYSE:HPQ) and the conventional wisdom that it is beating Dell (NASDAQ:DELL) like a drum. Granted, things are moving along swimmingly for Hewlett-Packard, as new management improves revenue and margins and cuts cost. But some of these events are already in the past, and the really hard work of sustaining growth for the future may be more difficult than expected.

H-P's stock should open at $32.50 today, which is a five year high. It is well up from its 52-week low of $20.75.

But a look back at Hewlett-Packard's numbers show that the company still has a way to go to get back to it margins of the past. According to Morningstar, in 2005 (fiscal ends October), revenue was $86.696 billion and operating income was $3.473 billion. Over the five years 1996, 1997, 1998, 1999, and 2000 the company produced average operating income per year that was higher than the 2005 number. And, this was on revenue figures that were closer to $40 billion a year as compared to the current $88 billion plus. That is to say, operating margins have dropped by more than half in the last five years.

The H-P numbers for their fiscal Q2 ending April 30 showed little progress over the immediate previous quarter, which ended January 31, 2005. Revenue actually dropped a bit from $22.659 billion to $22.554 billion. Operating earnings advanced very slightly from $1.492 billion to $1.675 billion. Guidance for the next quarter is $21.750 billion. As the company pointed out, this is traditionally slow quarter, but it still means three quarters in a row that are relatively flat.

Guidance for the full fiscal year ending in October is for $91 billion. The trailing twelve months including the quarter just announced showed revenue of $88.9 billion.

Not all of H-P's businesses did well in the last quarter. Europe, Africa, and the Middles East revenue dropped 2% compared to the same period last year. The company's services business also dropped 2% and the financial services segment fell 5%.

If it were not for the PC business growing 10% with 27% for notebooks, it would have been a difficult quarter. And this is the business where price wars are most likely to break out. It is difficult imagining that companies like Acer, Dell, and Lenovo are not going to step in to protect their shares. And, the company's server businesses do not have a clear running field as long as companies like IBM (NYSE:IBM) have a strong presence.

H-P is working against several other giant corporations trying to get share in the fields that fuel the company's potential growth: PCs, printers, storage, and imaging. But it would be rash not to give the new management its due.

By the same token, the next year of progress at Hewlett-Packard may be more difficult. No competitor wants to see the company do too well. Under those circumstances, maintaining the stock at a five-year high will be difficult.

HPQ 1-yr chart:



Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.

Source: Hewlett-Packard: Still A Long Way To Go (HPQ)