HP may signal tech upturn

The worst may be over for Hewlett-Packard, even though information technology spending continues to "bounce along the bottom", according to an analyst from Salomon Smith Barney.

The worst may be over for Hewlett-Packard, even though information technology spending continues to "bounce along the bottom", according to an analyst from Salomon Smith Barney.

John B Jones on Friday upgraded HP to a "buy" from a "neutral" and argued that the company is more likely to see improvement in its business than continued weakness. "As HP was first to signal a downturn, they could be the first to lead us out," said Jones.

He added that HP could be among the first tech companies to signal a rebound since it accurately predicted problems late last year. "HP's unique customer base (consumer, small and medium-sized businesses, and large enterprises) has been an early, reliable indicator of spreading IT spending softness in late 2000 and in the first half," said Jones.

The crux of Jones' argument for his "buy" rating revolved around the it-won't-get-worse theory. Jones said IT spending in the United States is lower, but stable. Europe IT spending is settling but still weak, and Asia-Pacific is "reasonable if spotty".

Jones also said that HP shares are a value at the current price of around US$26. He upped his price target on HP to $34 from US$30.

HP executives haven't indicated that business is improving, and most analysts remain wary about the company's prospects. According to Zack's Investment Research, 11 out of 16 analysts rate HP a "hold". And, at HP's analyst meeting last month, HP CEO Carly Fiorina said economic woes were spreading around the world.

Jones acknowledged that "a tough quarter or two should not surprise", as he cut his estimates for upcoming quarters. For the third quarter, Jones is now predicting earnings of 15 cents a share, down from his previous target of 20 cents a share. He also cut his fourth-quarter and fiscal 2001 estimates for earnings and revenue.

Indeed, Jones is expecting a rough third quarter for the period ending July 31. HP is expected to report earnings of 20 cents a share for the third quarter, a nickel a share higher than the analyst's prediction.

Nevertheless, Jones said HP's imaging and printing business remains solid, and its IT services business is just about staffed up. On the hardware front, the company still isn't making money on PC servers and is being hurt by the PC price war, but its high-end products are rebounding.

"It appears to be turning the corner in computer systems and IT services while imaging and printing remains solid" said Jones. "As a turnaround-valuation play it appears very attractive."

Using similar logic, Jones also upgraded Sun Microsystems, which reported earnings Thursday, to "buy" from "neutral". Though Jones upgraded Sun, other analysts remained cautious about the company's outlook, but did note signs of improvement.

Like HP, Jones said buying Sun shares is a much less risky proposition than it was three to six months ago.

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