HP's future: All eyes on the outlook for 2012

Wall Street expects HP CEO Meg Whitman to cut the outlook for 2012, but analysts are increasingly betting that the guidance won't be a total trainwreck.
Written by Larry Dignan, Contributor

Hewlett-Packard's fiscal fourth quarter results are only the appetizer for the real show: The company's outlook for the first quarter and fiscal 2012.

Wall Street expects HP CEO Meg Whitman to cut the outlook for 2012, but analysts are increasingly betting that the guidance won't be a total trainwreck. In fact, HP earnings are content to put fiscal 2011---a year with CEO and PC unit turmoil---to bed.

HP is expected to report fourth quarter earnings of $1.13 a share on revenue of $32.05 billion.

Sterne Agee analyst Shaw Wu summed up the prevailing view:

Our sense talking to investors over the last few weeks is that expectations are that Whitman will lower the bar to reset expectations. This makes sense coming in as the new CEO but also as global macroeconomic conditions remain very challenging. We have heard as low as $3.00-$4.00 in EPS. While we agree that numbers need to come down, we believe they will be better than feared, likely in the $4.30-$4.40 EPS range (vs. published consensus at $4.63 in EPS that nobody really believes anyway).

In other words, HP's outlook won't be all that bad only because analysts are expecting Armageddon.

Here are the key items to watch during HP's earnings conference call:

  • Rebuilding the balance sheet. Whitman has said that HP is rebuilding its balance sheet. Free cash flow will be HP's focus as it aims to replenish its coffers after spending $10 billion in cash for Autonomy.
  • The enterprise server, storage and networking business. Stifel Nicolaus analyst Aaron Rakers said in a research note that "HP’s enterprise server/storage results will be of particular interest as investors gauge a slowing x86 server demand environment." In addition, HP's Unix server business is likely to take a hit as the company battles Oracle in court over Itanium support.
  • Hard drive shortages. How will HP weather the shortages related to the Thailand flooding?
  • Cost cutting. Morgan Stanley Kathryn Huberty said she would be more optimistic about HP if "it lays out a clear plan to either resize the cost structure to better mirror secular shifts in its core PC, printer, server and outsourcing businesses, or lays out a clear plan to meaningfully shift revenues to higher growth markets."

In the long run, HP still has valuable assets. Its PC business should recover because rival Dell didn't go for the jugular. On Dell's most recent quarter, CEO Michael Dell said that the company was chasing margins and profits not PC market share.

Meanwhile, HP's server, storage and networking business is solid and is likely to remain that way. Sure, HP has issues. Whitman has to fix the services unit, integrate Autonomy, juice growth and diversify into higher margin businesses. But there appears to be stability at HP and that's enough to build on.


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