HP's Rise Above Currency Concerns

The day after Hewlett-Packard (HPQ) surpassed sales and profit estimates for its fiscal Q3, and forecast both top line and bottom ahead of expectations, there’s a big sigh of relief, with HP shares rising $2.47, or 5.65%, to $46.16 by today's close. (See earnings call transcript.) As I mentioned last night, strength came from the computer division, with some surprising weakness in printer sales. An interesting data point for all companies with large international exposure is that the recent rise in the dollar did not seem to affect HP much even though the company gets a measurable swing in sales from foreign exchange effects.

• Writing “HP’s strengths continue to prevail,” American Technology Research’s Shaw Wu writes this morning that “concerns over currency are overdone” and that “international continues to be key,” with 24% sales growth, year-over-year, in Brazil, Russia, India and China (BRIC). The 6% growth in the U.S. shows there are signs of a PC pickup. As I pointed out last night, PCs (the Personal Systems Group, PSG) was one of the areas of strength, and Wu notes that printer sales were light, offset by some strength in sales of supplies. Wu is also “confident” HP can “wring efficiencies” out of the EDS merger. Wu raised his estimates for next year to $119.7 billion in sales and $4 per share in profit from $119.6 billion and $3.95. Wu has a “Buy” rating on the stock.
• Calling the results “a solid quarter,” UBS Securities analyst Maynard Um writes today that the bears should start to back off the stock (through yesterday’s close, the shares were down 13% year-to-date), and that “We maintain our view that HP is a relatively safe place to be against the backdrop of a volatile macro economy, as we believe downside risk to earnings estimates is limited (global diversification, scale player, fairly visible and recurring revenue).” On the negative side, Um, who has a “Neutral” rating and a $49 price target, says the company is closer to having gained all its cost-cutting benefits, so he’s skeptical of CEO Mark Hurd’s contention yesterday that substantial cost-cut benefits lie ahead, waiting to see “more visible evidence” of such. Um raised his 4Q estimates to $30.4 billion and $1.04 from $30.3 billion and $1.02, and raised his 2009 and 2010 numbers, to $122.9 billion and $4.04, and $131.8 billion and $4.39, respectively.
• Meantime, Citigropup hardware analyst Richard Gardner sees “steady progress” and “another solid beat and raise” in last night’s results. “While the shares are likely range-bound for several quarters pending visibility into these headwinds,” meaning currency rate issues and the completion of the EDS merger, “our valuation analysis suggest a move to $72 within one year,” writes Gardner. Gardner focuses on some pessimism surrounding the imbalance between printer hardware sales (lower than expected) and printer supplies sales (higher than expected), and he says it shouldn’t be a worry as far as the company delivering 4Q results. “We believe that HP’s installed base remains stable in the highest-usage, most profitable segments of the market,” in printers, writes Gardner. Gardner, who has a “Buy” rating, upped his numbers, with 4Q going to $1.02 in EPS from $1, with $115.5 billion in sales this year, up from $115.2 billion, and EPS of $3.62, up from $3.56. He’s upping 2009 sales to $123.7 billion from $123.6 billion, while maintaining his $4.14 estimate for EPS.