HP ratings cut after missing target

Shares of Hewlett-Packard fall as analysts cut their earnings estimates and recommendations after the company fails to meet quarterly expectations.

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Shares of Hewlett-Packard (HWP) fell today, as analysts cut their earnings estimates and recommendations after the company failed to meet Wall Street's expectations with its first-quarter performance.

The stock was trading at 53 in afternoon trading, down 5-7/8 from yesterday's close, after Alex. Brown and Gruntal & Company issued downgrades this morning.

Alex. Brown downgraded its recommendation to "market underperform" from "market perform," while Gruntal lowered its rating to "outperform" from "strong buy."

Gruntal also cut its 1997 earnings estimate to $3.20 a share from $3.40 and lowered its 1998 estimate to $3.80 a share from $4.

HP reported a slight increase in revenues and profits after the market's close yesterday but cautioned that growth in orders slowed.

The company reported net profits of $784 million, or 75 cents a share, for the quarter ending April 30, compared with profits of $723 million or 69 cents a year ago.

Wall Street had expected the company to earn 80 cents a share, according to First Call. Revenues, meanwhile, grew 4.6 percent to $10.3 billion for the quarter, up from $9.9 billion a year ago.

"Overall, the good news from our perspective is that we achieved modest profit improvement, despite much slower revenue growth," chief financial officer Robert Wayman said in a conference call.

He added that the company has new products in the pipeline and will start to ship some of them in the second half of this year.

Hewlett-Packard saw its stock approach its 52-week high of 59-1/4 yesterday. Its shares closed at 58-7/8, up 2-1/4.

"For HP to do well, the printer business must do well, but we have seen very aggressive pricing pressure for ink jet [printers]," said analyst Doug Van Dorsten of Hambrecht & Quist.

Earlier this month, HP cut prices by up to 20 percent on its entire monochrome line of network LaserJet printers. Those cuts will continue to affect revenue.

Van Dorsten had expected revenue to grow about 8.5 percent to $10.7 billion and had predicted profits of only 75 cents a share. He added that increased competition in the desktop workstation business has been eating away at HP's market share.

"Certainly, Sun Microsystems (SUNW) is much tougher competition than it was two years ago. Sun has momentum, and HP has lost share in the desktop workstation market for five or six quarters. I'm skeptical over the near term."

But Van Dorsten noted that even though additional competition has entered the workstation ring, HP is a "well-run company" that is taking measures to bolster other areas of its business. HP is putting emphasis on servers and NT, and that might counter the lost market share in workstations, he added.

John Jones, an analyst with Salomon Brothers, added, "This is an industry that is constantly changing, and HP is very adept to making changes." To make the workstation business work, "they need to either build a more effective Unix offering that can compete with NT, embrace the NT/Intel offering and offset the Unix pressure, or retreat to the high end."

Jones also expected revenue for workstations to be down again this quarter, but he added that "the good news is that the workstations business is only five percent of the business."

"Unix workstations were very soft again this quarter, and the high end was very weak," CFO Wayman said. He added that the second quarter is not a strong part of the company's product cycle.

Meanwhile, HP may be able to piggyback on the growth of the semiconductor industry. Even though increases in the global chip industry is projected to be a modest 4.6 percent in 1997 to $138 billion, weighed down by a flat first quarter, the yearly growth rate is expected to be 20 percent for the next three years, according to a report released this week by the Semiconductor Industry Association.

Improvements in the semiconductor industry and capital spending may boost demand for HP's testing-and-measurement business, which currently generates about nine to ten percent of the company's revenue, according to Van Dorsten.

Meanwhile, as with all companies that have a portion of their business overseas, a strong dollar reduced revenue and order growth by about three percent, Wayman explained. In addition, he said demand in Europe will continue to be lower than hoped.