Full 360-Degree Preview for Hewlett-Packard Earnings

Technology

Published: August 20, 2014 11:50 am

Hewlett-Packard Co. (NYSE: HPQ) will report its third-quarter earnings after the close of trading on Wednesday. We have featured an earnings preview for the PC and IT-services giant, as well as other issues to consider.

Hewlett-Packard has consensus earnings estimates from Thomson Reuters of $0.89 in earnings per share (EPS) and $27.01 billion in revenues. This would compare to earnings of $0.86 per share a year ago, and it would represent a 0.8% drop in total corporate revenues. In the last quarter, HP offered guidance of $0.86 to $0.90 in adjusted EPS. We would point out that the guidance excluded after-tax charges of about $0.27 per share tied to amortization of intangible assets and restructuring charges.

While Meg Whitman keeps telegraphing that the turnaround will not take hold until 2016, investors will be looking to see what the company offers for guidance in the coming quarter. Thomson Reuters has the consensus estimates for the coming quarter as $1.05 EPS and $28.62 billion in revenues, which would compare to the period in the prior year of $1.01 EPS and $29.13 billion in revenues.

What investors need to know is that HP’s stock has recovered much of its losses from when shares dipped to under $15. In fact, HP shares are effectively back up to the mid-2011 levels before the problems started to get really bad here.

As we have said before, the actual earnings report may just be the proverbial tip of the iceberg. Investors are still looking to see how this turnaround is coming. Despite nearly tripling from the lowest part of the stock drop, HP is still valued at only about 12 times trailing earnings and only about nine times next year’s expected earnings. HP’s dividend yield is 1.9%, which still leaves room for improvement.

Several key issues were seen in HP’s previous earnings report. HP generated $3 billion in cash flow from operations. That was down by 16% from a year earlier. HP used some $831 million of its cash to repurchase approximately 26.7 million shares of common stock. The company also exited the quarter with some $15.4 billion in total cash.

Analysts have been mixed on HP. The stock was recently raised to Buy from Neutral by the small firm Monness Crespi & Hardt. Back in June, Goldman Sachs capitulated from its perma-bear stance and raised its rating to Neutral from Sell and its price target was raised to $32 from $25 (with shares trading at $33.25 at the time). Deutsche Bank recently named it a top tech stock for the rest of 2014.

Here are several other key issues to consider along with the formal earnings report:

The most recent round of layoffs probably did not do wonders for morale inside of Hewlett-Packard.
HP’s move into 3D printing has been lowered on expectations.
Another big deal will be whether the strong business recovery from Intel in processors means that PC sales were better than expected.

A review of the chart below (from StockCharts.com) shows that HP’s 50-day moving average has acted as support for all of 2014. That current level would be down at $34.57. And to show just how much the stock has rallied, its 200-day moving average is all the way down at $30.89.

Another consideration is the stock options trading. The options volume for this week’s expiration has been much stronger on the call options side — so investors are likely hoping for the bull move to continue. After looking at the nearest strike prices, options traders are braced for a move of up to $1.00 in either direction.

Hewlett-Packard shares were down about 0.5% at $35.30 prior to earnings in late morning trading. HP’s stock has a 52-week range of $20.25 to $36.21. Its consensus analyst price target is $36.93, and the highest analyst price target was above $43 on last look.