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Tickers in this Article: HPQ, DELL, IBM, CSCO, AAPL, EMC, INTC
It says something about today's market when a company that already carried relatively modest expectations gets hammered anew over a relatively small slip in guidance. Fair or not, that is the reality for Hewlett-Packard (NYSE:HPQ) - yet another tech greybeard that investors seem to want to pack off to glue factory. While it is true that Hewlett-Packard has challenges and deficits to correct, patient investors may want to be opportunistic here as the hot money cashes in their chips and moves on to the next idea.

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A Sour Start To The Year
Hewlett-Packard impressed nobody with its fiscal first quarter results. Revenue rose 4% from the year-ago level, but fell 3% on a sequential basis. Unfortunately, that level was below even the bottom end of the analyst range for this quarter.

Although the company's servers, storage and networking business was strong - a good read-through for EMC (NYSE:EMC) and Juniper (Nasdaq:JNPR), but problematic for Cisco (Nasdaq:CSCO) - that was about it. Imaging and printing was not bad and seems to be outperforming Lexmark (NYSE:LXK) and Xerox (NYSE:XRX), but software performance was mediocre and computer and service revenue were quite disappointing.

HP is in decent company with its poor service results. IBM (NYSE:IBM) and Dell (Nasdaq:DELL) both had sluggish performance here recently. But the computer results are more concerning. HP's consumer computer revenue was down 12% and the company is not doing especially well in China. While some of the computer under-performance might be due to channel inventory issues ahead of the new Intel (Nasdaq:INTC) chip launch, it may also be the case that Apple's (Nasdaq:AAPL) iPad sales really are biting into the laptop market.

Moving on from revenue, the news is neither especially good or bad. The company's gross margin was soft (down almost half a point) on a sequential basis but solid on a year-on-year comparison. Operating margin picked up a little better, as operating profit grew 14% from the year-ago level, but the quality of the performance was arguably not top-notch.

Looking Ahead
HP seems to have three significant brushfires to handle with respect to the Street. If tablets really are chewing up the laptop market, HP has a problem (along with chip companies like Intel, AMD (NYSE:AMD), and Nvidia (Nasdaq:NVDA). Even though HP intends to compete in the tablet market, they are more than a couple of steps behind Apple and Samsung at this point.

Problem number two revolves around the service business. Service is a surprisingly large part of HP's revenue base and this is a fiercely competitive market. It is also a business with above-average profits and the company can not afford to let this slip away.

The third concern for the company is what management has in mind to boost growth. The company has a fairly clean balance sheet and HP management could marshal billions towards acquisitions if it wished to do so. Here's the problem - "old tech" is cheap, but nobody wants to see HP buy any more of that, while "new tech" is exciting and growthy, but very expensive. Consequently, investors are going to want some rather clear guidance from management on just what exactly the M&A strategy is going to look like for the next two or three years and if it looks like the company is chasing expensive growth, that is a problem.

The Bottom Line
I have to confess some surprise that the stock reacted as badly as it did to first quarter earnings. My model estimates were already conservative, so HP's new lower guidance doesn't move my fair value estimate at all. Perhaps more concerning, though, is the fact that there is still a pretty optimistic cadre of sell-side analysts on this stock - it is entirely possible to validate a purchase of HP shares on conservative numbers, but if over-optimistic analysts find themselves backing down from their too-high forecasts, it will create a definite overhang on the perception of this company and stock. (For more, see Strategies For Quarterly Earnings Season.)

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