Citigroup: Hewlett-Packard Should Outperform Dell Through Year-End

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Includes: DELL, HPQ
by: Eric Savitz

In a note previewing the earnings announcements coming Thursday from Dell (DELL) and Hewlett-Packard (NYSE:HPQ), Citigroup’s Richard Gardner advised investors that HP shares should outperform Dell through the rest of the year, though he continues to recommend both stocks.

Gardner expects Dell to report fiscal third quarter results in line with his estimates of $14.5 billion and 26 cents a share, both a bit above the Street consensus. Gardner writes that he does not expect detailed fourth-quarter guidance from the company, but that the company”may comment qualitatively” on consumer purchase deferrals ahead of the January 30 consumer launch of Microsoft’s Windows Vista. He advises increasing Dell positions on weakness.

As for HP, Gardner expects fiscal fourth quarter results in line with his estimates of $24.1 billion in revenue and non-GAAP EPS of 67 cents. (His profit forecast is about 3 cents ahead of the Street consensus; HP has guided to 61-63 cents.) Gardner thinks fiscal first quarter guidance will be in line with the Street consensus of revenue of $23.9 billion and non-GAAP profits of 60 cents a share.

Gardner sees a near-term catalyst for HP stock in a planned December 12 analyst meeting; he expects the company to outline plans for an additional $2 billion in cost savings over two years. Assuming 50% of those costs flow through to earnings, he says, the anticipated cost cuts would add 25-30 cents a share to non-GAAP EPS. He advises investors to stay overweight HP shares.

This morning, HP is down five cents at $40.15. Dell is off 36 cents at $25.13.