Analysts to check out H-P makeover

Analysts will get a chance to look underneath the hood of the new-look Hewlett-Packard Co. (NYSE: HWP) Wednesday during the technology giant's semi-annual analysts' day.

The Silicon Valley institution certainly shook things up a bit in March when it announced that it would split into two separate companies, effectively spinning off its measurements business from the core PC and imaging divisions.

For a company that does between $45 billion to $50 billion in annual sales, that's quite a departure from the norm. But that's what CEO Lew Platt and some analysts believe will help it better compete in the online age.

The analysts' meeting probably won't have any significant impact on H-P shares since the bulk of the discussions will revolve around strategy rather than current financials.

But that's exactly what analysts are dying to hear about.

"I'm looking forward to hearing what they have to say," said Bill Milton, an analyst at Brown Brother Harriman. "Each meeting has a different theme and I'm guessing the Internet will be one of their bigger themes this time around."

After watching from the sidelines as IBM Corp. (NYSE: IBM) installed perhaps the world's best e-commerce machine, H-P has finally realized something has to change. While H-P does do its fair share of business online, it's nowhere near the volume of competitors such as IBM, Dell Computer Corp. (Nasdaq: DELL) and Compaq Computer Corp. (NYSE: CPQ).

"I expect they'll focus on some of their new product lines and some of the things they have on the drawing board, but I'm more interested in hearing about their e-commerce initiative," Milton said. "I'm sure that will be a hot topic."

While H-P did beat analysts' estimates in its second quarter, the sequential and year-to-year revenue growth has been less than spectacular.

In the second quarter, H-P earned $918 million, or 88 cents a share, on sales of $12.4 billion. But that wasn't much of an improvement versus the first quarter when it earned $929 million, or 86 cents a share, on sales of $11.9 billion.

And first-quarter sales were only fractionally higher than the year-ago period when it recorded sales of $11.8 billion.

"Some people were excited about the earnings and the revenue this quarter, but I wasn't," Milton said. "That's why I'm neutral on them despite the recent stock run-up."

Indeed, H-P shares have been white-hot lately, surging from a 52-week low of 47 1/16 in October to 97 9/16 earlier this month.

Most of those gains are directly attributed to the company's makeover.

"Everyone's excited to see that H-P is actually doing something proactive for the first time in a long time," said Dan Niles, an analyst at BancBoston Robertson Stephens. "It's long overdue."

Analysts will also press H-P officials on how they plan to combat shrinking average selling prices in the PC sector as well as increased competition in the high-end printer market.

"Guys like LexMark (NYSE: LXK) and Xerox (NYSE: XRX) are moving in on them," Milton said. "That's another issue they must address."

Some analysts are also concerned that much of H-P recent earnings success is a more a product of cost cutting rather than gains in either market share or gross profit margins.

"Expectations have been ridiculously low in the past few quarters," Milton said. "They're not going to be able to get away with that much longer."

Most analysts are expecting H-P to improve its sales by 10 percent to 12 percent in the second half of 1999, thresholds that seem reasonably attainable.

First Call consensus expects H-P to earn 79 cents a share in its third quarter and $3.57 a share in the fiscal year.

Seventeen of the 26 analysts following the stock rate it either a "buy" or "strong buy."