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Thursday, February 19, 2009

Hewlett Packard (HPQ) 1Q:2009 results

Revenue of 28.8 bil missed consensus of 31.9 billion.  EPS were in-line due to tight expense controls and selective product shipments in the inkjet category.  Though units were decent, the strength was clearly at the low end of the line.  Inventory was built year to year in printers and PCs.  Guidance of 112.4 – 116.0 billion and $3.76 - $3.88 is below prior 127.5 – 130.0 billion and $3.88 – 4.03.

While the earnings outlook was maintained, I don’t know how they’ll actually get there.  In the current quarter, they throttled back inkjet hardware shipments to inflate overall printer margins.  As ink is almost entirely profit, its the hardware component that has negative margin effect.  The problem in doing so is that less HP printers out there eventually leads to less ink opportunity.  As channel inventories grew in most categories, this is likely to dampen recovery for the company if and when demand ticks up as they’ll have to cut through the channel inventory.

Though earnings estimates remain relatively solid, revenue growth was worse than my expectations – every category was down.  Their market share gains are apparently due to aggressive pricing.  Cost controls were better but it was due to deliberate cutbacks in R&D and a lower tax rate.

HP appears to be manipulating results to show better earnings.  Business dropped significantly – it’s expected that you’d see some weakening operating metrics.  Instead HP is trying to obscure that weakness to please investors than properly investing in their future.  Think about it.  They’ve been offering aggressive financing when the rest of the world is pulling back on it, they’re investing less in their future by cutting R&D, they’re seeding the inkjet business with less hardware to prop up margins which will lead to lower ink sales in the future, channel inventories are higher than normal when everyone else is cutting inventories.  Does this sound like they’re managing the long-term or the short-term business?

While HP is cheap based on earnings estimates (its under 9* 2009 estimates), it’s inconsistent with my world view to be long the stock.  Weisel upgraded the stock so it’s only down a buck from last night’s close.  I sold the balance.

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