HP Results Show No Uptick Yet in IT Spending

May.20.09 | About: HP Inc. (HPQ)

Hewlett-Packard (NYSE:HPQ) Tuesday provided still further evidence that a much hoped for pick-up in IT spending has yet to materialize.

In reporting earnings for the fiscal second quarter ended April, HP demonstrated a continued focus on cutting costs - it will lay off another 2% of its workforce over the next 12 months - and continued depressed demand for both enterprise computing and printing products.

The sell-off in the shares Wednesday no doubt largely reflects disappointment with guidance: the company revised its fiscal year revenue outlook to the bottom end of the previous range, and projected July quarter revenue to be flat to down 2% sequentially. CEO Mark Hurd maintains a cautious stance on the call, saying there is no indication of a rebound so far from the company’s customers.

As Kaufman Bros. analyst Shaw Wu notes Wednesday morning, HP’s basic message - that we may have bottomed, but we’re not seeing any pick-up in IT spending - is not much different from the recent commentary from IBM, Cisco (NASDAQ:CSCO), Microsoft (NASDAQ:MSFT) or Intel (NASDAQ:INTC). “While HP sounded more guarded in its forward tone..its slightly tempered revenue outlook is similar and we think the prudent thing to do in this environment,” Wu writes. “Arguably, HP could have projected a more upbeat tone, but the reality is that we remain in a difficult macroeconomic environment and visibility remains fairly limited.”

As Goldman Sachs analyst David Bailey notes, the miserable performance in enterprise hardware has negative implications for corporate IT focused companies like Dell (NASDAQ:DELL), EMC (NYSE:EMC), IBM, NetApp (NASDAQ:NTAP) and Sun Microsystems (JAVA); on the other hand, he says the aggressive stance on inventory management sets the stage for component restocking that could benefit companies like Intel (INTC), Advanced Micro Devices (NYSE:AMD), Marvell (NASDAQ:MRVL), Micron (NASDAQ:MU), Western Digital (NYSE:WDC) and Seagate (NASDAQ:STX).

Here are a few other tidbits from this morning’s batch of HP-related sell-side research:

  • RBC Capital’s Amit Daryanani maintains his Outperform rating and $39 target, asserting that while conditions remain challenging, “the macro situation has started to become incrementally more positive.”
  • Caris & Co.’s Robert Cihra raised his target on the stock to $40, from $35, but maintained his Average rating. He thinks investors looking for a mega-cap defensive tech play would be better off owning IBM, with what he considers a truer annuity stream in its software maintainence revenues compared to HP’s less predictable reliance on printer supplies. He notes that enterprise server and storage revenue fell 28% - and he says there are few signals to suggest a near-term rebound.
  • BMO Capital analyst Keith Bachman maintains his Outperform rating, but trims his target to $48, from $49. He notes that revenue was actually a little worse than it appeared at first glance, with FX less of a headwind than expected. “While HP’s quarter was far from spectacular, we revert back to the line of reasoning that our bottom line estimates are not changing materially and therefore we are not changing our view on the stock,” which is that the shares offer a compelling value based on a non-GAAP EPS or free cash flow multiple.
  • Goldman analyst Bailey maintains his Buy rating on the shares, citing “the company’s ability to meet or beat earnings expectations in a weak environment,” as well as “the leverage that is being added to the model that will drive upside once demand begins to improve.”
  • Citigroup’s Richard Gardner sounds a similarly bullish theme, repeating a Buy rating and upping his target to $54, from $51. “A near-term catalyst is tough to identify, but we continue to like the company’s long-term positioning and valuation remains attractive,” he writes.
  • Credit Suisse’s Bill Shope repeats his Neutral rating and $35 target. “While HP is clearly not an expensive stock, the deterioration in the printer business and hardware margins is likely to pressure the shares further in the near term.”
  • Collins Stewart analyst Brian White says the HP results suggest more trouble ahead for the contract electronics manufacturing sector. “A key takeaway from HP’s call is IT spending does not appear to be turning the corner, which we believe some of the EMS and connector stocks will require to support current stock price levels,” he writes.

HPQ Wednesday is down $1.72, or 4.7%, to $34.86.

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