Running with the "Hurd"

05/26/2006 12:00 am EST


Paul Tracy

Editor, The StreetAuthority Market Advisor

"During the recent one day 200+ point decline, one solitary Dow Jones Industrials Average component was up," notes Paul Tracy, editor of StreetAuthority Market Advisor. That lone gainer was Hewlett Packard, a favorite of the advisor. Here’s his review.

"I’ve been bullish on Hewlett-Packard (HPQ NYSE) since the new chief executive Mark Hurd took over, and I have not been disappointed. He has done everything he promised so far: Rationalized the business lines, cut costs intelligently, improved the marketing dramatically, and reinvigorated engineering innovation.

"It's pretty hard for a company like HPQ to buck its whole sector, however, so its excellent first-quarter earnings report Thursday might possibly be the last stand for bulls for awhile. In the stock market, more than 60% of an individual stock's behavior is accountable to whether its sector is in or out of favor, and with the NASDAQ now down for the year after the recent sell-off, it will be hard for HPQ to keep its chin up.

"In the first quarter, HPQ said it earned 54 cents per share, which beat consensus estimates by five cents. That was a 54% increase over last year, which is fantastic. It shows that the restructuring plan is working and the company's earnings power is greater than most believe possible. We think of a restructuring plan as involving a lot of cost cutting and layoffs, but in this one Hurd has also lifted salaries at the company. This has resulted in a happier work force, even though it was a three-cent yankdown on earnings. It was probably a smart investment.

"The earnings number wasn't just about costs. Revenues were also up 8% year over year to be exact. There is certainly momentum in its notebook, enterprise storage, and server lines, as well as printing and imaging. I hear that HPQ has invested more in its sales staff, so more doors are being knocked on, and they're being knocked more frequently. Bravo.

"It's hard to believe, if you knew the old HPQ, that the company has also managed to take market share from Dell. What a turnaround. Preliminary numbers suggest that HPQ's personal computer and server biz was up 9% year over year, versus only +6% for Dell. And it also seems HP was more profitable in both lines than Dell as well.

"Hurd and crew finished their presentation today by lifting earnings guidance for the third quarter and full fiscal year by a lot to as high as 48 cents a share for Q3 versus 43 cents consensus, and as high as $2.08 in fiscal '06, versus $1.95 consensus.

"In summary, HPQ is in one of those sweet spots where you can see that it is improving across the board and the Street just doesn't believe it. The company has disappointed people for so long that all good news is pooh-poohed. I think that when the current market malaise is over and buyers return, HPQ will emerge as a big winner. That might not happen until the fourth quarter of this year, but we all know that patience is a virtue. Continue to buy HPQ."

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