HP investors to eye progress in servers, PCs

Duncan Martell

SAN FRANCISCO: Hewlett-Packard Co. investors will look to the No. 2 computer maker's progress in boosting profitability in its server and storage and PC businesses when the company reports quarterly results in mid-February.

Chief Executive Carly Fiorina has faced fresh criticism in recent weeks for inconsistent financial results and the wisdom of buying Compaq Computer almost three years ago.

"Whether they can pull it off or not still remains to be seen," said Marty Shagrin, an analyst at Victory Capital, which owns some HP stock, and who was opposed to the HP-Compaq deal. "We thought it would dilute the value of HP's imaging business and I think, so far, that's probably been borne out."

Many consider HP stuck between rivals IBM at the high end, with its servers, storage and services business, and Dell, at the low end, in PCs. Dell also has moved into the printer market and gained share rapidly.

"I want to see them deliver on guidance and continue to make improvements in their enterprise business," said Shawn Campbell, principal at Campbell Asset Management, which owns HP shares. "They can't keep slipping up in other businesses."

Speculation among analysts and investors has also mounted that HP may be forced to write down some of the billions in dollars of goodwill the company has on its books due to the Compaq deal, which would be a drag on earnings and arguably a sign that the Compaq deal didn't work.

But investors don't see Fiorina's job at immediate risk. "She's at a bigger risk where you have results that aren't what people are expecting for a quarter or two," Shagrin said.

In its most recent quarter, the fiscal fourth, HP's printing group accounted for 68 percent of the company's operating profit and 30 percent of revenue.

"The beef most people would have with the company is that HP is trading at about what the printer business is worth," Campbell said. "I have to agree that the other pieces of the business don't have to be part of the mix."

Analysts peg the value of HP's printer business at about $20 per share. On a trailing twelve months basis, HP is trading at 16.82 times earnings per share, less than the 22.06 times earnings per share for the Standard & Poor's 500 Index.

HP's enterprise storage and server business returned to an operating profit in the most recent quarter, after stumbling badly in the previous quarter, when a switch to new information technology systems and "unacceptable execution" hurt sales.

Analysts expect HP to post a profit before items of 36 cents in its first fiscal quarter of 2005, up from 35 cents a year ago, and for revenue to reach $20.96 billion, an increase of 7.4 percent, according to Reuters Estimates.

The PC business, No. 2 after Dell, has improved somewhat. In the fourth quarter, PC operating profit margins were 0.01 percent, up from 0.004 percent in the prior period.

Earlier this month, HP said it would fold the PC business into its printer business, chilling speculation HP might spin off printers.

Shares of HP closed on Friday at $19.34, down 15 cents, on the New York Stock Exchange. The stock has risen 11 percent since May 3, 2002, when HP and Compaq merged. Dell stock has climbed 69 percent and IBM stock rose 14 percent.

Investors said that, for now, Fiorina's job is secure.

"From the outside looking in, I would still tend to believe that she's going to be given the opportunity to make this work," Campbell said.