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Dell, Hewlett Show Times Are Still Tough

Another tough day for technology earnings. With any luck, we'll get a couple of quiet weeks before earnings warning season starts up again in September.

Hewlett-Packard is trading up this morning only because the company managed to lower expectations far enough that it had room to surprise to the upside.

And Dell is down this morning after saying that its usual gain in third quarter sales will not appear this year.

And it's another day of "extraordinary items" clouding earnings results.

Both Dell and Hewlett excluded substantial charges from the pro forma results reported in their press releases last night. Hewlett reported pro forma earnings of 11 cents a share and GAAP earnings of 5 cents. Dell reported pro forma earnings of 16 cents, and a GAAP loss of 4 cents.

We'll leave it to others to debate whether the GAAP system is antiquated and due for an overhaul. GAAP numbers are what is reported to the SEC. They are what the data services use to calculate important measures of valuation such as PE ratios. And when the gap between GAAP and pro forma is great, it's a warning sign for investors that all is not right.

And now for a look at valuation. Dell trades at 36 times this year's estimates, and has a 19% projected long-term growth rate. Hewlett trades at 30 times this year's estimates and has a 12% projected long-term growth rate. Under the PEG ratio, that makes Dell a good buy at $12 and Hewlett at about $10. Ken Lee's Trouncing the Dow places a fair value on Hewlett of $15.63 a share, and Dell of $16.11. Either way, both stocks have a ways to go if they're going to become good investments, which is, after all, what we are looking for here.

A look at both charts indicates that they could have more downside ahead. Dell will gap below both its 200-day moving average and an uptrend line this morning. And Hewlett broke down at $25 recently and should be headed to $19 or so at some point.

And finally, the futures are down substantially this morning on an earnings warning from Ford and the trade balance report. The trade balance and business inventories for June, both released this week, mean that second quarter GDP, already at a razor-thin 0.7%, will likely be revised downward in two weeks.