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HP Shrugs Off Downturn With Strong Results

HP
Hewlett-Packard posted stronger-than-expected results and forecast full-year profit above Wall Street estimates, underscoring its resilience to an economic crisis that has dragged down other tech companies.

Shares of HP (NYSE: HPQ) jumped 10 percent as its preliminary October quarter results suggested the world's largest-maker of personal computers was winning market share and benefiting from recurring revenue streams from services and printing supplies.

HP has lost about a third of its market value in the last two months on fears of a sharp slowdown in PC spending, which had increased after chip giant Intel (NASDAQ: INTC) shocked markets with a revenue warning last week and electronics retailer Best Buy (NYSE: BBY) slashed its outlook.

"HP is gaining market share in an extremely strong competitive position. They've got share gains, combined with very aggressive cost reduction," said Shannon Cross of Cross Research.

"It's very prudent management of their resources, and that's allowed them to put out numbers that are ahead of the Street even in this economic environment," she said.

HP's preliminary net profit in the fiscal fourth quarter that ended October 31, was 84 cents per share, or $1.03 excluding items such as restructuring and acquisition charges.

Analysts were looking for earnings per share of $1.00, excluding items, according to Reuters Estimates.

Fourth-quarter revenue rose 19 percent to $33.6 billion, or an increase of 16 percent when adjusted for currency effects, compared with the average analyst estimate of $33.1 billion.

The company forecast fiscal 2009 earnings excluding items of $3.88 to $4.03 per share, which beat the average Wall Street estimate of $3.86, according to Reuters Estimates.

HP, which is scheduled to post full results next Monday, did not detail which parts of its hardware, software or services units were strong, saying only that it was benefiting from its global reach, diverse customer base and cost cuts.

It said in September that it would lay off 24,600 employees following its acquisition of Electronic Data Systems. HP also said on Monday it would extend its planned one-week holiday shutdown by an additional week to save costs.

Downside risk

HP's outlook helped bolster the NASDAQ and other tech shares including Dell, IBM and Apple. But analysts warned investors against too much optimism, saying HP was likely to outperform rivals such as Dell, which is more reliant on the PC market.

"The threat of a consumer pullback is real and present. It's unlikely that companies large and small can sidestep the structural weakness on the consumer side," said Ashok Kumar, analyst at Collins Stewart. "But those with a broader portfolio -- like Hewlett-Packard and IBM -- will be able to weather the storm better than the likes of Dell."

Calyon Securities analyst Shebly Seyrafi said that while HP's figures were better than expected, the downside risk is for demand for PCs, especially notebooks, to slow.

"PC visibility is getting worse by the day and what they are seeing right now may not be true in a couple of months," he said. "So although what they are guiding for fiscal 2009 is positive relative to consensus, it still may be too high once the final numbers come in."

Indeed, HP's revenue forecasts for both its fiscal first quarter, which includes the critical year-end holiday season, and fiscal 2009 were below Street expectations.

HP said the revenue outlook was based on an unfavorable currency impact of about 5 percentage points in the first quarter and roughly 6 to 7 percentage points for the full year.

"These numbers are comforting to investors because there was a lot of question about what impact they would see from a stronger dollar versus the euro and a weaker dollar versus the yen. Now you have a pretty good sense of where things are," said Cross.

HP shares rose as much as 15 percent in early trading before settling at around $32.30, or a 10 percent gain from their previous close of $29.34 on the New York Stock Exchange.