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Tuesday, September 16, 2008

Hewlett Packard – what you see is not what you’ll get


Last night HP offered some estimated cost savings from the EDS acquisition. They also reiterated guidance for the quarter.


Dell does 95% of their business direct to customers. Hewlett Packard, on the other hand, sells to distribution. This creates a ready-to-go inventory channel for the company. It also allows them to say business is fine without talking about the dynamics of fine. It would be very surprising if Ingram Micro and Dell saw all this weakness and it wasn't affecting purchases of HP machines. I think inventory in the channel has to be high. Typically HP stocks distributors during the summer in anticipation of the "back to school" fall and begins to stock in front of the holiday buying seasons. If they're not seeing weakness in this quarter, I would expect they'll see it in the next.


I think the strength in the stock is a great time to get short the stock. They're telling you that their customers haven't yet pulled back when their customers are telling you that demand is materially below their expectations. That's a setup for disappointment going forward.


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