HP shares dip 9 percent

Hewlett-Packard fell 6.0625 to 60.0625 in trading of 12.7 million, making it one of the most active stocks in U.S. markets. Earlier, shares dipped below 59.75. Before today's 9 percent plunge, the shares had gained 35 percent since late August.

Yesterday the Palo Alto, California-based company said that first-quarter earnings may fall and fiscal 1999 sales won't meet earlier forecasts, as it struggles with increasing competition and weakness in Asia and Latin America. Though cost-cutting and a lower tax rate helped HP beat analysts' forecasts for fourth-quarter profit, sales growth was a tepid 3.7 percent.

"HP is going to struggle for a while longer," said Matthews Cherian, portfolio manager and technology analyst at David L. Babson & Company, which owns about 3 million shares of HP. "The problems there are long term and can't be dealt with easily by just cutting costs."

HP is now expected to earn 87 cents a share in the first quarter ending in January, the average estimate of analysts surveyed by First Call. The company had profit in last year's first quarter of $929 million, or 86 cents a share.

HP was hurt earlier this year by rising costs that ate into profit as revenue growth slowed. Chief executive Lewis Platt has trimmed expenses by cutting jobs, asking managers to take 5 percent pay cuts, and shutting some facilities for short periods.

In the fourth quarter ended October 31, expenses fell to 23 percent of sales, down from 24 percent a year ago and 24.6 percent in the third quarter. (See related story).

"This will work for another few quarters, and then we need to see growth," said analyst John Jones of Salomon Smith Barney, who rates the stock "buy." HP's sales had been expected to be as high as $12.4 billion.

HP's growth lags peers like IBM, in part because it doesn't sell as much software and services. IBM saw sales increase 8 percent and profit rise 10 in the most recent quarter.

IBM's services business, which designs, installs, and maintains computer systems for large corporations, is its fastest-growing unit, with sales rising more than 20 percent for the past several quarters. By contrast, revenue from HP's services business, which isn't as broad as IBM's, rose only 9.3 percent in the fourth quarter.

HP's computer-services business consists mainly of setting up systems, while IBM manages them over long periods. As computer networks have become more complex and critical to business, many customers want to have someone else take care of their systems.

"HP is at heart a product company, and today the complexity is higher so people prefer solutions," said analyst Steve Milunovich of Merrill Lynch. "IBM is positioned better."

HP also faces steeper competition particularly in the printer market, one of its most profitable businesses. Xerox Corp. and Lexmark International are becoming increasingly aggressive, putting pressure on prices for printers and digital copiers. HP has introduced 20 new machines since August, including the $14,500 Mopier 320, which is targeted at Xerox's Document Centre line of products.

While PC sales were strong in the fourth quarter, sales of HP's high-end server computers, inkjet printers, and test and measurement products were weak. "The PC business had a decent quarter, but it's the fifth business in terms of profit generation," Cherian said.

In August, HP told analysts to expect 8 percent to 12 percent sales growth for fiscal 1999, said Bill Milton, an analyst at Brown Brothers Harriman, who rates HP "neutral." "By the end of [yesterday's] call it was more like 8 percent," he said.

Yesterday's warning marks the second time this year HP has scaled back expectations.

Copyright 1998, Bloomberg L.P. All Rights Reserved.