Hewlett-Packard: Bucking the Trend

published 18 May 2006

The stocks of the biggest names in the computer industry have taken a beating recently amid price wars and weakening demand for PCs. Among the sufferers are Intel, Dell, and Microsoft -- each a leader in different segments of the business. But shares of Hewlett-Packard have bucked the trend, gaining 13% since the beginning of the year. The reason: improved profits stemming from cost-cutting measures and strong sales in its printing and imaging divisions.

Hewlett-Packard is the second largest PC maker (behind Dell). The Palo Alto, Cal., company also makes printers, servers and consumer electronics, such as flat-panel televisions. In the second quarter of its 2006 fiscal year, the company reported profits of $1.5 billion, up 51% from the year before. During the same period, sales grew 5%. At $32, HP's shares (symbol HPQ) trade at 16 times analysts' estimated earnings of $2.06 per share for the fiscal year that ends next October, according to Thomson First Call.

Many analysts reacted positively to the earnings report. Daniel Renouard of Robert W. Baird raised his rating from neutral to outperform and boosted his price target from $35 to $40. He told clients that he believes HP's profits will continue to grow because of restructuring efforts launched by chief executive Mark Hurd, who took the reigns in March 2005 after HP's board fired Carleton "Carly" Fiorina. Hurd is leading the company in an ambitious three-year cost-cutting plan that involves reducing the number of data centers and trimming smaller projects to focus on larger initiatives.