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2HRS2GO: Look for strong 3Q from HP

Today's market is betting Hewlett-Packard Co. (NYSE: HWP) will report solid earnings Monday. There are plenty of reasons to be confident.

Having slapped HP on the wrist yesterday in the wake of a court decision involving a dispute over sales of printer chips to Xerox, investors returned to optimism a day ahead of HP's scheduled report of fiscal third quarter results. Shares of HP were up 3 1/2 to 106 9/16 in mid-afternoon trading.

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First Call's consensus estimate of 13 analysts predicts third quarter earnings of 80 cents a share. Many observers expect to hear about strong server sales. HP also introduced new printers during the quarter.

SG Cowen analyst Richard Chu expects revenue of $12.5 billion in the quarter, up 11 percent from a year ago. His earnings estimate is 79 cents a share, a penny below consensus. "But I think there's upside to that number," he said.

Much of the optimism probably stems from the fact that HP blew out second quarter estimates a couple of months ago. Sequential and year-to-year revenue growth of 4 percent isn't that impressive, but remember that until the formal breakup, HP includes a lagging measurement device business. Even with the breakup transition to manage, HP executives have said they expect low double-digit growth, in percentage terms, for the second half of the year.

HP has a relatively easy comparison with a year ago. Still, Chu believes the current growth rate is sustainable given the company's new products, more aggressive stance in the marketplace and rebound in Asia. "The most important number is the revenue," he said. "They have been stuck in the low singled digits for a while and this will be the first quarter where they will have a double digit jump."

People tuning into Monday's conference call should listen for signs of how much business HP is getting from its attempt to brand itself as the hardware provider of choice for online business. When HP earlier this year unveiled its decision to break up, the announcement was packaged with plans to boost its image as an Internet company. That was also the theme of the analyst meeting held in June.

The issue is especially important because rivals such as IBM Corp. (NYSE: IBM) and Sun Microsystems Inc. (Nasdaq: SUNW) have already seized the initiative. IBM's long-running "e-business" campaign has gotten Big Blue to the point where it now claims a quarter of its overall revenue comes from Internet-related initiatives. And no doubts that Sun, marked by its "Dot in Dot Com" campaign, is among the leaders in providing servers for Internet companies.

Investors might be reassured further if Hewlett-Packard would start providing more details about its businesses. The company in the past wouldn't be specific about sales of individual product lines (or even entire groups such as PCs); with the coming break-up, investors deserve a better picture of what's going on inside the company so they know just what they're getting out of this division.

But that's nitpicking. As long as HP can convince the market it's a tiger unleashed, shareholders will be happy.

Other issues:

  • IXnet Inc.
  • (Nasdaq: EXNT)Talk about bucking a trend.

    The world might be crazed with dreams about the business possibilities of the Internet, IXnet Inc. (Nasdaq: EXNT) extols the virtues of the proprietary corporate network. IXnet, which offers a voice/data extranet for the financial services world, hopes investors buy into the idea, although they haven't so far; the company's stock price has hardly budged since its IPO yesterday.

    IXnet -- which has secured just one major customer so far, Deutsche Bank, although it could be two if you count Optimark -- faces a daunting task merely going up against large communications carriers; but its model also competes with the entire Internet. The Internet may not be reliable enough at the moment for some large financial institutions, but within a decade, that might change. And then where does that leave IXnet?

  • Globalstar Telecommunications Ltd.
  • (Nasdaq: GSTRF) Iridium has cast a pall on the satellite phone sector, and many observers look to Globalstar as a potential savior for the industry. Globalstar at least seems to have its financing down; but technical questions aside, pricing remains an issue.

    Globalstar wants to target developing countries and other places lacking a solid phone infrastructure. Iridium couldn't get enough users from industrialized countries to pony up for its outrageous prices, so it'll be interesting to see how much Globalstar's service will cost for people in less wealthy regions.

    Broad market indices appear to be ending the week on a strong note. Going into the final two hours of this week's trading, the Nasdaq Composite Index was up 70.22 to 2619.71 and the S&P 500 higher by 26.87 to 1325.03. The Dow Jones Industrial Average had risen 181.73 to 10971.12. 22GO>