Bracing for H-P Earnings: Did Its Dominance Peak? (HPQ, EDS, IBM, DELL)

Traders and investors alike are braced for the long awaited earnings out of Hewlett-Packard Co. (NYSE: HPQ) after today’s close.  First Call has estimates at $0.83 EPS on $27.41 Billion in revenues.  Estimates for the October quarter (also the year-end) are expected at $1.00 EPS on $30.22 Billion in revenues.  Please see below for the forward estimates of 2009 because of key developments and issues around the stock.

As a reminder, back on May 13 we saw the landmark announcement whereH-P was paying $25.00 per share to buy Electronic Data Systems (NYSE:EDS).  The deal has already been approved by EDS shareholders. The combined value of this deal was estimated at $13.9 Billionand would more than double H-P’s IT services revenues.  H-P showed$16.6 Billion in IT services revenues in 2007.  This was enough of atransformative deal that brought up comparisons to the IBM (NYSE: IBM)of old before the Lenovo sale, and it even took away "some" of thedirect comparisons between H-P and Dell Inc. (NASDAQ: DELL) thatinvestors have maintained for years.

This acquisition and a softening economy have combined to keep a lid onthe stock of H-P after its monumental post-Hurd share rise.  Before theEDS rumors came out, this was a $49.00 stock and the current handle is$43.50; its 52-week trading range is $39.99 to $53.48.

So far, 2008 has been a very disappointing year for shareholders.Shares peaked in late-2007.  From the start of 2005 H-P shares ran from$20 and peaked out at that late-$2007 level giving a gain of more than150%.  Its market cap now sits at $107 Billion.

Analysts are still very positive on H-P as the price targets are about$56.00.  That would the shares above highs not seen since 2000 beforethe tech bubble burst.  The charts are around some key levels as thestock just fell under its 50-day moving average (now $44.58).  Sharesused the 200-day moving average as resistance in June and failed tobreak above that level for any longer than a few minutes.  The 200-daymoving average now sits at $46.64.  With shares having traded to $41.00at the worst levels in July and with these key long-term movingaverages above today’s prices after shares failed to rally above$46.00, it would be easy to say there is a lot of resistance above.

Options traders appear braced for a move of $2.00 to $2.45 in eitherdirection.  That implies again that shares would not quite run intomajor resistance nor would they bust through old major support levels(assuming the options traders are correct).

What will be more interesting than the actual report is the progressreport on their transformation and how this guidance will affectrevenues and earnings on a post-integrated HP-EDS out into 2009.

Jon C. Ogg
August 19, 2008