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Hewlett-Packard Q4 Results May Miss Street View

 November 16, 2012 02:02 PM

(By Mani) PC maker Hewlett-Packard Co. (NYSE: HPQ) may report its October quarter results below consensus and its own expectations when it reports financial results on Nov. 20 as sagging PC demand and slowing shipment growth could weigh on the fundamentals.

Wall Street expects HP to earn $1.14 a share for the fourth quarter, according to analysts polled by Thomson Reuters. This implies a 2.6 percent drop from $1.17 earned last year and 1.7 percent decline from HP's implied forecast of $1.16 a share. However, the consensus estimate is a 14 percent growth from $1 a share earned in the third quarter of 2012.

HP may want to keep its momentum of positive earnings surprises as it has managed to beat consensus in the past four quarters. In the past 90 days, consensus estimate has decreased from $1.18 a share to the current $1.14 a share, and EPS estimates have been cut four times during the last 30 days.

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Quarterly sales are expected to fall 5.2 percent to $30.45 billion for the fourth quarter. However, the revenue estimate implies 3 percent growth from third-quarter sales of $29.67 billion.

"Fundamentally, we see headwinds in multiple segments but notably within PCs (share losses and pause into Win8), IPG (channel inventory and weak Cannon results), and Server (share losses) segments," RBC Capital Markets analyst Amit Daryanani wrote in a note to clients.

During the calendar third quarter, HP lost the position of world's top PC vendor to China's Lenovo Group Ltd., according to technology research firm Gartner, Inc. Worldwide PC shipments in the third quarter fell 8.3 percent to 87.5 million units, and Lenovo took the No. 1 position in worldwide PC shipments for the first time in the company's history as its market share increased to 15.7 percent while HP's global PC share fell to 15.5 percent.

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HP lost its position as the world's top PC vendor for the first time since the third-quarter of 2006 when it took the world PC lead from arch rival Dell, Inc. (NASDAQ:DELL), which reported a 47 percent drop in profit, and 11 percent decline in sales for its third-quarter. Both earnings and revenues missed Street expectations.

Meanwhile, HP's PC segment will continue to represent a top-line headwind in the October quarter, driven by softer than expected demand momentum ahead of the Windows 8 product launch.

Canon's reduced outlook for fiscal 2012 with regard to laser printers and consumables coupled with HP's intent to further reduce supplies inventory could signify further deterioration in the company's IPG segment in the October quarter.

"That said, we think HPQ's new product introductions (multifunction printers) and stability in supplies sales after channel destocking may limit deterioration q/q and provide revenue opportunity in the Jan-qtr," Daryanani noted.

HP's Enterprise Segment may face headwinds from server sell-through. The company expects revenue from enterprise services will fall 11 percent to 13 percent in fiscal 2013, with operating margins of 0 percent to 3 percent.

"We believe HPQ's Enterprise Storage and Servers segment (ESSN) will face incremental headwinds in the Oct-qtr due to market share losses, limited benefits from the Romley refresh cycle, and ongoing headwinds from proprietary servers (HPQ's BCS line)," the analyst said.

In addition, peer performance in services and company-specific issues should limit near-term upside in its Service business.

"While HPQ outlined revenue targets of down 11–13% for FY13 on customer losses (5%), FX (2%) and other company-specific issues, we believe demand trends heading into the company's Q412 should limit sequential revenue growth and upside to FY13 revenue assumptions," Daryanani added.

Recently, HP said it sees fiscal 2013 earnings of $2.10 to $2.30 a share and adjusted earnings of $3.40 to $3.60 a share. Analysts currently expect the company to earn $3.52 per share for the fiscal year 2013.

In addition, Moody's placed the long term ratings of HP under review for downgrade after the personal computer maker warned of profit decline in fiscal year 2013, adding that its turnaround would take time. The ratings agency has kept HP's A3 senior unsecured rating under review for downgrade. The P-2 short term rating is not under review.

Moody's expected the company to generate $6 billion to $7 billion of free cash flow, which compares to management's revised expectations of about $4 billion over the next fiscal year.

Meg Whitman, who was appointed as HP CEO in September 2011, has been making sweeping organizational changes for the past one year in a bid to make HP a leaner and meaner company. In May, HP said it would cut about 27,000 jobs by the end of fiscal year 2014 as part of a restructuring drive that is expected to generate annualized savings of $3.0 billion to $3.5 billion, majority of which will be reinvested back into the company.



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