What H-P Didn't Tell You Ahead of Earnings (HPQ)

Hewlett-Packard (NYSE: HPQ) is expected to report earnings after the close of trading today.  Last week, the company gave guidance which was ahead of plan and gave guidance farther out on the curve than any of the major tech companies have offered.  But there are still issues surrounding the company and the industry which extend far and wide.  These issues could even put that prior guidance at risk even if the economy in early 2009 does not get as bad as we expect.

The company’s guidance for the fourth quarter was a gain in net revenue of 19% to $33.6 billion and non-GAAP earnings growth of about 20% to$1.03.  This puts fiscal 2008 net revenue up 13% to $118.4billion.  Where this gets interesting is the guidance for the comingquarter we are currently in now (Q1) and the guidance ahead out a fullyear.

For the first fiscal quarter of 2009, H-P projected revenues of $32.0 billion to$32.5 billion range and forecasted non-GAAP earnings of $0.93 to $0.95 EPSrange excluding after-tax costs of approximately $0.13 per share.  For the full fiscal year OCT-2009, H-P expects revenue of $127.5 billion to$130.0 billion range and forecasted non-GAAP earnings of $3.88 to $4.03 EPS excluding after-tax costs of approximately $0.50 per share.

What the company told you is that its diverse customer base and a broadportfolio are contributing to the success, as are its cost containmentefforts.  The company also noted "taking market share and expandedearnings."

What is most interesting is that the PC market is literally changingunder our feet.  While this level will improve when the economyimproves, the "cheap consumer becoming even cheaper" is driving theaverage purchase prices much lower.  We have discussed this sub-$500concern getting far worse now that the lap top market is offering suchpowerful computing for under $400.00.  HP sells a 15.4" laptop underthe Compaq brand that comes with Windows Vista, all the normal wi-fiand DVD bells and whistles, dual-core processor, 2GB DRAM, 120 GB HardDrive and more.  This is no longer just a possibility: in this climate, this is driving down hardware margins.

So unless all the high-end PC’s buyers in the world are only buyingHP-brand PC’s and laptops, then the company either is starting to seethe pinch or will start to feel the pinch in that side of the business.What is interesting about the PC business is that the public doesn’thave to upgrade their monitors or their printers if they just want a PCupgrade.  That means that EDS, consulting, and software/enterprisebusinesses are holding up better than elsewhere.

Options just expired Friday and with the VIX at such levels werediscounting the actually "planned impact"of this earnings report basedupon options prices of today.  But if we did not discount the numbers,we’d give you the simple explanation that options were braced for amove of $2.10 to almost $2.70.

HP is already up 20% from its lows, but shares are still down more than 30% from their 52-week highs.

We will still be weighing on most of the data the company gives today,but with guidance out just last week we are not expecting as large of amarket reaction to the news than we would have expected if no guidancehad been given.

Jon C. Ogg
November 24, 2008