Earnings Preview: Hewlett-Packard

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Hewlett Packard Company (HPQ) is scheduled to announce its fourth quarter 2012 results on November 20, 2012. In the run-up to the earnings release, we noticed a downward trend in analysts’ estimates.

Third Quarter Overview

The company reported third quarter 2012 earnings per share (EPS) of $1.00, beating the Zacks Consensus Estimate by a penny. Revenues declined 5.0% year over year to $29.7 billion. Revenue declines were broad-based across segments and geographies.

Gross margin in the quarter stood at 23.1% compared with 23.4% in the year-ago quarter. Gross margin was impacted by improvements in IPG and Software margins, but were offset to a considerable extent by declines in PSG and Services.

Diluted GAAP loss per share was $4.49 compared with earnings per share of 80 cents in the comparable prior-year quarter. This loss can be attributed to the write down in lieu of Electronic Data Storage (EDS). After adjusting for special items, non-GAAP net earnings per share were $1.00 compared with $1.10 in the prior-year quarter.

The company projects fiscal 2012 non-GAAP diluted EPS of between $4.05 and $4.07 and GAAP loss per share of between $2.23 and $2.25.

Agreement of Analysts

Four of the 23 estimates for the fourth quarter were lowered over the last 30 days with none moving in the opposite direction. For the first quarter of 2013, two analysts made downward revision over the last 30 days, while only 1 analyst revised the estimate upward. For fiscal 2013, while five analysts revised their estimates downward over the last 30 days, none made an upward revision.

Analysts are generally cautious about the PC market, where demand could weaken further. HP is likely to resort to aggressive pricing, which would not however, fully offset the effect of weak demand. As a result, its Personal Systems business would suffer. Marketing and promotion strategies are expected to continue in the near term, although the resultant negative effect on the bottom line would be offset by recent restructuring actions.

This apart, both the industry and HP itself entered the quarter with high inventories in a particularly low-demand environment. Therefore, this inventory would also need to be worked off.

Although some analysts believe that the decision taken by the company to continue with its PC business is correct, others are of the opinion that the PC segment is going to be badly affected due to its cannibalization by tablets. If the ultra portable new-age devices from HP are a hit, the company may be able to cut its losses.

Analysts also believe that HP is facing significant competition in the printing space given the continuous roll out of printing devices at competitive prices by other technology giants including Samsung, Canon (CAJ), Epson and Lexmark (LXK). This may initiate a price war in the printing space, which may hurt HP’s margins to a certain extent.

Magnitude of Estimate Revisions

Following the announcement of third quarter 2012 results, there have been certain estimate revisions. Though the Zacks Consensus Estimate for the upcoming quarter has remained constant over the last 30 days, it has gone down 4 cents over the last 90 days to $1.14. For the January quarter, the estimate dropped a penny over the last 30 days and by 18 cents over the last 90 days to 85 cents. 

For fiscal 2012, the Zacks Consensus Estimate dropped by a cent over the last 30 days and by 3 cents over the last 90 days to $4.03 per share. The fiscal 2013 estimate dropped by 2 cents over the last 30 days and by 13 cents over the last 90 days to $3.46.

Recommendation

Hewlett-Packard dominates the computing world with its strong business model and strong position in both PC and Server segments. However, the recent downturn in the PC market and a not-so-favorable pricing environment took a toll on the business fundamentals of the company.

Management’s decision to continue its PC business looks prudent. On the other hand, HP is expected to witness significant competition from the likes of Apple Inc. (AAPL) and Dell Inc. (DELL).

The company has a Zacks #4 Rank, implying a short-term Sell rating.

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