Things seem to be moving in favor of Hewlett-Packard Company (HPQ). The technology major has recently made the highest bid for the storage technology major 3PAR Inc. (PAR) in its effort to tap new markets for its computing products.
Recently, the company has won an $800 million contract spreading over a period of five years from the U.S. Air force. As per the terms of this agreement, the company will supply desktop and laptop computers along with servers and storage devices over the tenure of the contract.
Over the past five years, HP has supplied 720,000 desktops and 40,000 laptops to the Air force, which have strengthened the company’s position in the Government vertical.
The company’s top slot in the server market establishes its strength and confirms its intention to lead in businesses other than personal computers. HP has already strengthened its networking line of business by grabbing another networking company 3Com Corporation.
Enterprise Storage and Servers (ESS) is the largest business within HP’s Technology Solutions Group. The segment has benefited from its move to Industry Standard Servers (ISS) offering better margin, changing the product mix within ESS.
During the third quarter of 2010, ESS revenues climbed 19.1% year over year, driven by the increase in ISS revenues, which moved up 31.3% year over year. We believe that with a revival in the macroeconomic scenario and an improving spending environment, as the server demand continues to grow, this segment will attract additional customers and generate more business volume.
Despite the company’s market position and compelling product line, we remain cautious about future growth, especially on the consumer side. We also see the departure of CEO Mark Hurd as a negative, since we believe that retention of key personnel is a prerequisite in the current competitive market environment.
On the other hand, we believe that HP’s financial strength will enable it to supersede Dell (DELL) in the 3PAR bidding war. We expect the company to come out as a winner in this deal, as it has a history of successful takeovers. The 3PAR win could enhance the target market for HP, but would like to witness better performance from its printing unit in the upcoming quarter.
We have a Neutral rating on HP, with a short term Zacks #3 Rank (Hold).
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