HP looks good, but could attract worrywarts

Hewlett-Packard shareholders have been a happy lot of late and at first blush HP's third quarter earnings should give Wall Street another reason to cheer. But it won't work that way. Here comes the big HP exhale.

HP reported third quarter operating earnings of 85 cents a share. Including charges related to the spin-off of the soon-to-be-public Agilent Technologies, HP's measurement business, the company reported earnings of 81 cents a share. In any case, HP beat estimates of 80 cents a share.

More importantly, HP reported double-digit revenue growth with sales of $12.2bn (£7.6bn), up 11 percent from $11bn a year ago. HP is showing it can compete in the e-business world.

But that same success, which has boosted HP shares, also attracts the nitpickers. You know the type -- the folks who just have to worry about something. Whenever things look good for a company the expectations bar is raised higher.

That's why Dell Computer can pitch a perfect quarter and investors will still get ulcers worrying about whether Dell can maintain its growth. HP is no Dell when it comes to revenue growth, but it's about to get its share of worrywarts. It's nothing to worry about considering HP has reinvented itself and upstaged Compaq Computer by hiring Carly Fiorina as CEO. The highly-regarded Fiorina is a Lucent alum.

However, HP's conference call surfaced a few issues for nit-pickers to chew on.

HP finally delivers the top line growth, but people will say it isn't enough. Revenue came in at $12.2bn. SG Cowen analyst Richard Chu was expecting $12.5bn. Other critics will say HP had an easy comparison and it did. But give them a break.

On the earnings front, HP reported a big gain in interest income, which boosted its earnings.

HP kicked some tail with its PC sales. On a conference call, Robert P. Wayman, HP's financial chief, said sales of servers, notebooks and PCs were all strong. In fact, Wayman said HP's PC business pitched a perfect quarter. But it won't last. Wayman said he expects PC gross margins to suffer as the company goes aggressively after the home market and has to fight pricing pressure on the low-end of the market. Meanwhile, demand for HP's UNIX servers were not as strong as expected.

HP will be a completely different company in the fourth quarter because of the spin-off of Agilent, which will operate independently on November 1. Wayman said the company will detail revenue expectations for the new HP, featuring the PC and printing and imaging businesses in future conference calls. For now, the guidance is for fourth quarter revenue growth of about 11 to 13 percent. HP has to watch its guidance given the Agilent IPO.

Always a hot topic on the message boards, investors want a stock split for HP. They didn't get one. The stock split worry is basically information age whining, but can hurt stock performance.

And there are other issues for the worrywarts to fret about. HP's enterprise storage revenue took a hit as expected. HP stopped reselling the wares of EMC. Currency effects and other issues will boost expenses a bit, but officials said they will "remain vigilant".

Look for the HP exhale, but keep the big picture in mind. A lot of good news has been priced into HP shares. HP, which said it isn't seeing any year 2000 issues, is a lot more aggressive, has strong leadership and is making some noise in the market. HP's core printer and PC businesses are doing very well. "Entering the fourth quarter we have our strongest product portfolio in our history," said Wayman.

That may even impress the worrywarts.