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Tickers in this Article: HPQ, IBM, DELL, CSCO, EMC, INTC, AAPL
Hewlett-Packard (NYSE:HPQ) is another one of those large well-known tech companies that just cannot get much love anymore. Even though the growth outlook here is not very good, the valuation seems to assume a slide to irrelevance. That puts HP in the same crowd as companies like Dell (Nasdaq:DELL), Cisco (Nasdaq:CSCO), Microsoft (Nasdaq:MSFT) and Intel (Nasdaq:INTC) - companies that really have yet to convince the Street that there is a workable plan for growth and a reason to own the stock.

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The Second Quarter Wasn't That Bad
The worries about HP's guidance will almost certainly overshadow a decent quarter for the company. Sales rose 3% (1% on a constant currency basis), and actually surpassed estimates. The enterprise, storage and networking segment grew 15%, software grew 17% and imaging and printing grew 5%. That helped to offset a sluggish result in services (up 2%) and a 5% decline in the PC business.

Profitability was also pretty solid in the fiscal second quarter. The gross margin rose 100 basis points, and while the company lost some of that momentum through the operating items, operating income still grew 3.8% and the company reported a small increase in margin. Not surprisingly, software, services and printing were margin leaders, while the PC business was a drag.

Guidance, the Problem Today
Wall Street definitely has not liked what it has been hearing from HP in recent days. First there was a leaked memo effectively instructing company executives to freeze hiring and minimize expenditures. Then the company followed this up in the actual earnings release by pointing to disruptions from the Japanese earthquake and sluggishness in the PC business as the culprits in a fairly substantial earnings guidance cut for the next quarter.


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Competition a Bigger Problem Long Term
Even if Japan is causing problems for the company, that's not among the biggest issues. HP's CEO seemed to suggest that the sluggish performance in sales is a byproduct of underinvestment; that's curious, given the disappointing results from companies like IBM and Computer Sciences (NYSE:CSC) that suggest some basic market weakness.

Likewise, it's unclear where HP's best future growth prospects lie. Maybe the introduction of new chips from Intel will fuel a rebound in PCs, but it seems like smartphones and tablets have taken share, and HP doesn't seem to have the products to compete with Apple (Nasdaq:AAPL), Research In Motion (Nasdaq:RIMM), Samsung and so on. Likewise, the company does not seem to really be building a lasting franchise in servers (competing on price in many cases), and EMC (NYSE:EMC) likely does not regard HP as a major threat to its storage business.

Maybe HP can get better growth from services, but that is an incredibly crowded field. Elsewhere, HP's printing and imaging business is a good asset, but probably not a major source of growth. So, it is hard to see where HP can really find the juice for above-market growth.

The Bottom Line
Quality is not the problem with HP, but then quality is not the problem at techs like CA Technologies (NYSE:CA) either. The problem is figuring out how HP will generate above-average revenue and cash flow growth. If Hewlett-Packard can grow free cash flow by low-to-mid single-digit rates, the stock is dramatically undervalued. Even if the company can't grow much more than 1%, it looks no worse than fairly priced. That's a pretty strong base of negativity, but investors attracted to HP's valuation need to come prepared with an abundance of patience - value doesn't play well in the growth-obsessed tech world, so it will take time for that idea to work.

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