Hewlett Packard’s (HPQ) earnings guidance provided at the analyst meeting for fiscal 2010 was in-line with the Zacks Consensus Estimate of $4.26 per share.
The company expects revenue of approximately $117.0 – $118.0 billion, up approximately 3.0% to 5.0% from 2009 estimated revenue. GAAP earnings per share are expected to be in the range of $3.60 – $3.70, a growth of 17% to 20% from 2009 estimated earnings, while non-GAAP earnings per share are expected to be in the $4.20 – $4.30 range. H-P also said the projections were conservative and could easily exceed the company’s forecast.
H-P’s guidance validates that the IT industry is expected to return to growth and technology spending will rebound in 2010. Moreover, H-P sees a recovery in its PC business, which will help the company grow its top line as its PC division contributes nearly a third of overall sales.
In order to cut the competition in the PC market and increase sales, the company has launched new laptops for $298, which was sold at Wal-Mart (WMT) in July and costs $100 less than a similar product from Dell (DELL). Also, H-P rolled out a PC for the holiday season that costs $549, which is $150 less than the laptop introduced earlier. This will definitely help HP grow its revenue in the PC segment.
H-P forecasted revenue growth of 2% – 4% in its services division and 3% – 5% growth in its PC business. The company expects 0% – 2% growth in its printing group and a 2% – 4% growth in storage and servers for fiscal 2010.
H-P plans to improve margins driven by strong expense management and solid contribution from services, as well as the savings from the acquisition of EDS. The company saved $900 million through the end of the third quarter and expects to save $2.1 billion by the end of fiscal 2010. H-P also rebranded its EDS services division in order to better compete with its closest rival International Business Machines (IBM).
H-P’s 2009 third quarter revenue and adjusted earnings were slightly above the Zack Consensus Estimate due to strong results in the Technology Solutions Group, which represents more than half of the company’s total profits, highlighting the strength in services.
Moreover, H-P’s earnings guidance of $1.12 per share for the fourth quarter of 2009 was well above the Zacks Consensus Estimate. The company also expects revenue to be up approximately 8% sequentially for the fourth quarter.
We are confident about H-P’s performance going forward as demand is stabilizing and its cyclical businesses (particularly consumer PC) are rebounding. Moreover, H-P has gained share in both PCs and servers against its rivals making it the number-2 provider of IT services, slightly behind IBM.
However, we remain concerned about the long-term growth prospects for the company’s printing unit, which has seen a revenue fall of more than 20% in the current year and continued pricing pressure, which may lead to further erosion of profits.
While the company plans to control costs through layoffs and generate incremental savings, the recovery will be slow. H-P faces intense competition from IBM, Cisco Systems (CSCO) and Apple (AAPL) which have reported positive results.
Thus, we maintain our Neutral rating on the stock.
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