Hewlett-Packard Profit Tumbles, Looking Ahead

By Sham Gad | February 28, 2012 AAA

PC and printer maker Hewlett-Packard (NYSE:HPQ) reported fiscal first quarter net income of $1.47 billion or 73 cents a share, down 44% from the year earlier earnings per share (EPS) of $1.17 a share. Absent one time charges, EPS was 92 cents in the fiscal first quarter ended Jan. 31, 2012. Sales were $30 billion, off by 7% year over year. Analysts' estimates were looking for EPS of 87 cents on revenues of $31 billion, respectively.

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A Work in Progress
The biggest anchor for HP during the quarter was the significant decline in computer hardware. The company's Personal Systems Group saw revenue decline 15% year over year. Looking deeper, the consumer segment was hit the hardest. Consumer client revenue dropped 25% compared with 7% on the commercial client side. Overall, total computer unit sales declined by 18% with similar declines for both desktop units and notebook units. It's not surprising to see such a decline in computer sales. Computing has become much more mobile thanks primarily to the smashing success of Apple's (Nasdaq:AAPL) iPad. In addition to the growing popularity of tablet computers, smartphones are like many computers today. Thanks to the iPhone and the big push by Google's (Nasdaq:GOOG) Android software, smartphones are becoming the new notebook computers for many. (For related reading, see Apple Stock: $500 And Climbing?)

Better Days Ahead
PC sales will face headwinds going forward. Even Dell (Nasdaq:DELL) has acknowledged it, and it continues to focus on the IT side of the business to fuel future growth. While system sales are still going to be important for HP, this is the company's first full quarter under new CEO Meg Whitman. So, it's certainly too early to judge HP's future at this juncture. But like Dell, HP is experiencing growth on the software and service side of the business. Software revenue grew 30% year over year. Today's data heavy computing needs will create a greater demand for IT support. HP's strong position in the market puts it a great spot to leverage continued software and service revenue.

The Bottom Line
The company maintained its full year outlook of EPS of $4. Given the rapidly changing nature of the tech industry, that figure will likely change over the year. At the present moment, HP shares trade for $26 or a 9 P/E multiple. Yet, with a new CEO at the helm and some bad corporate decisions behind it, HP should be set for better days ahead.

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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