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Thursday, November 16, 2006

Bogeying Hewlett-Packard Earnings; Dell's Problems Act As A Gift

Stock Tickers: HPQ, DELL

Hewlett-Packard (HPQ) was given a gift with all of the problems at Dell (DELL) as far as what they have to show today. As for earnings, the street is looking for HPQ to post $0.64 EPS on revenues of $24.1 Billion. The street is also looking for EPS at $0.60 and revenues of $23.9 Billion for the quarter ended January 31, 2007.

The "pre-texting" scandal and invasions of privacy to protect its corporate leaks seems so far to be geared mostly to people who have left or been booted. We'll also get to see if the company is really using its $6 Billion allocated toward share buybacks.

It recently acquired VoodooPC to attack Dell's acquisition of Alienware to capture the premium high-end PC-gamer market. It also is heading more into the consulting and IT-side of the business after it completed the Mercury Interactive acquisition for some $4.5 Billion. The street has been guessing if the company will or will not make more acquisitions, so we'll have to look to see if they say more there on that front.

PC margins are still expected to grow from the 4% area now, despite the fact that this is already up since its Compaq acquisition. The company has regained its number one position as far as PC sales. The street is probably as confused as the public about how the release of Windows Vista at the end of January is going to affect all PC makers over the next quarter or two, so we may have to look at HPQ earnings for other metrics than the PC business and we'll have to treat it based on the overall "feel-good generalities" that the company gives us today.

Each quarter there is a hope that the printing & imaging operations will not be as dominant down the road (last quarter was $6.2 Billion out of $21.9 Billion total revenues and $884 million net income out of the entire $1.5 Billion non-GAAP net income).

The stock is up more than 15% since its mid-September lows, but shares are up 53% from the 52-week lows. While the stock is up within 2% of its yearly high put in earlier, its chart based on various technical indicators is surprisingly not saying that it is grossly overbought. The fundamental analysts are still more positive than negative on the name, but the average price target appears to be $42 to $43 on the stock.

It should be kept in mind that options expire tomorrow at the close of the market, but options traders appear braced for a move of roughly $0.85 to $0.95 based on current trading. There is also a net effect of left over contracts to the tune of only 12,000 or 13,000 options contracts in the closest put and call options that expire tomorrow, but there are actually just under 140,000 contracts in the open interest of the closest put and call options before you take the pairing off into consideration.

The company has to be thankful as could be since Dell dropped the SEC bomb today and delayed earnings. This may have at least taken some of the recent scandal news heat off of H-P, but now the media can focus more and more on how the overall restructuring plan is going since the same people that cover DELL and HPQ now only have to worry about what H-P says today. What ever the company says, they at least don't have to worry about Dell stealing their thunder tonight.

The company is projected to post revenue gains next year of close to 5% for Fiscal Oct. 2007 to roughly $96 Billion and expected to show EPS growth of about 13-14% to $2.48 or so for the same period. Now the street has to look ahead to that to see if the company can guide above that now that H-P is no longer just a turnaround and hotshot new CEO story promising headcount reductions and cost cutting measures.

Jon C. Ogg
November 16, 2006
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