HP shares slip despite solid 3Q numbers; stock hurt by CEO departure, fears about PC demand

Friday, August 20, 2010

HP shares slip on CEO departure, PC demand

SAN FRANCISCO — Hewlett-Packard Co. shares slid nearly 3 percent Friday, a day after the world’s largest technology company reported solid quarterly numbers that still weren’t enough to appease some anxious investors about the company’s path without ousted CEO Mark Hurd.

Signs of weakening personal computer sales heading into the all-important back-to-school season also hurt the shares. HP is the world’s No. 1 PC maker and gets a third of its revenue from PC sales.

THE SPARK: HP reported fiscal third-quarter numbers after the market closed Thursday. Net income rose 6 percent and matched analyst expectations. Revenue rose 11 percent and slightly exceeded them.

THE BIG PICTURE: The numbers show that HP prospered in the last full quarter under Hurd, who in five years as CEO was revered on Wall Street for his deep cost cuts and for having steered HP into more profitable businesses than PCs, such as outsourcing and computer networking.

Many investors are now nervous about who HP will pick to succeed Hurd, who abruptly resigned August 6 in an imbroglio with the board of directors over a sexual harassment claim against him and the filing of inaccurate expense reports.

THE ANALYSIS: Shaw Wu, an analyst with Kaufman Bros., said that PCs, printers and computer servers were strong, while services — the slowest-growing of HP’s major divisions during the quarter — was a “relative underperformer.” He noted that HP’s gross profit margin was “surprisingly strong” but added that finding a new CEO will continue to weigh on HP’s stock as “Mark Hurd won’t be easy to replace.”

Robert W. Baird & Co. analyst Jayson Noland said the consumer market for computers is experiencing worrisome trends, offsetting HP’s solid performance elsewhere. HP’s market valuation “appears very attractive, though we don’t expect much from the stock until a new CEO is appointed and able to articulate a strategic vision for the company.”

Caris and Co. analyst Robert Cihra said he still expects a “meaningful deceleration” in the momentum of HP’s PC sales. He noted that the number of PCs that HP shipped in the latest quarter rose 12 percent over last year, a slower growth rate than the 20 percent increase in the previous quarter. He cited softening consumer demand as one reason, and HP walking away from deals that would have resulted in retailers selling HP’s computers too cheaply.

SHARE ACTION: HP shares fell 2.4 percent, or 99 cents, to $39.77 in afternoon trading Friday. HP’s market value stood at $93 billion. Since Hurd’s abrupt resignation August 6, the drop in HP’s stock price has wiped out about $15 billion in shareholder wealth.

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