Hewlett-Packard Gains On Strength Of BRIC Business

By Eric Fox | August 25, 2008 AAA

Hewlett-Packard (NYSE:HPQ) reported strong earnings that beat analyst estimates in the third quarter, surprising bears who expected global economic weakness to hurt results. The company also raised guidance for the fourth quarter.

The company reported revenue of $28 billion and earnings per diluted share of 86 cents, which excluded a special item related to the amortization of intangibles. Analysts were looking for 83 cents. Hewlett-Packard said it expected earnings to be $1.01-1.03 in the fiscal fourth quarter that ends in October. Revenue is expected to range between $30.2-30.3 billion.

Strong International Sales
Hewlett-Packard's strong performance was helped by international sales of its products, as the company gets only 32% of its revenue from the U.S. The strongest revenue growth during the quarter was from the BRIC countries of Brazil, Russia, India and China, which saw revenue growing 24% over the third quarter last year. Sales to these emerging economies now total 10% of Hewlett-Packard's total revenues. (Discover how these markets can increase your returns with less risk than you think in Re-evaluating Emerging Markets.)

The company was helped significantly on the top line by currency translations during the quarter. Hewlett-Packard sales grew by 5%, rather than the 10% reported growth, if the effects of currency are excluded, as the dollar weakened against the other currencies that the company does business in. Management admitted this effect during the conference call and said that the revenue outlook for the next quarter is based on "currency rates from the beginning of August and if the dollar stays at current levels, there would be "downward pressure" on revenue. (To learn more, read Currency Moves Highlight Equity Opportunities.)

Conference Call Highlights
The management of Hewlett-Packard discussed the quarter in further detail during the conference call. Investors learned the acquisition of Electronic Data Systems (NYSE:EDS) is expected to close in August, and the company will host an analyst meeting on September 15 to outline the financial impact to the company. Hewlett-Packard will issue debt to fund the purchase since most of its cash is held offshore.

Other highlights included: Management expects further strong growth in the BRIC countries citing triple-digit growth in Russia during the quarter. Sales of desktops and laptops were up strong in the Personal Systems Group, helping the company continue with the highest market share in this space. The company bought back 34 million shares at a cost of $1.6 billion, and has $3 billion remaining on its authorization.

The Currency Ripple Effect
Other companies that benefited from the weaker dollar when they reported results were Estee Lauder (NYSE:EL), Revlon (NYSE:REV) and Colgate Palmolive (NYSE:CL), all of whom have large international sales.

Competitor, Dell Computer (Nasdaq:DELL) reports on August 29, 2008, and investors should watch these results for further clues on current business trends, both domestically and internationally. Dell has about 55% of its revenue outside the U.S., and currency fluctuations will impact its results also.

Bottom Line
Hewlett-Packard's strong results and raised guidance gave ammunition to those investors who believe that emerging economies will continue to grow even as the developed world slows down, sparing companies that do large amounts of business overseas.

For more on currency exposure, check out Taking Advantage Of A Weak U.S. Dollar.

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