Hewlett-Packard Co shares soared near their 52-week high on Wednesday after investors saw signs a turnaround plan was gaining traction, but Wall Street worried the improvement was coming at the expense of margins.<\/p>\n
HP shares jumped nearly 10 percent to $27.56 in afternoon trading, after at least one brokerage raised its rating on the PC maker’s shares and another nine raised their price targets.<\/p>\n
Expectations had been low for HP’s fourth quarter following a disappointing third quarter and after rivals IBM and Cisco Systems Inc reported poor results.<\/p>\n
But HP surprised on Tuesday, reporting stronger-than-expected revenue due to growth in its enterprise group, which supplies servers, storage and networking products to corporations.<\/p>\n
“HP appears to continue to struggle with improving its margins and share together, despite substantial cost cuts – particular in its enterprise business – and we worry about profitless prosperity,” Bernstein Research analyst Toni Sacconaghi said in a note to clients.<\/p>\n
Chief Executive Meg Whitman said Tuesday the company needed to improve margins, even as HP’s enterprise sales rose 2 percent compared with a year earlier and 12 percent versus the previous quarter.<\/p>\n
The cause for concern was that its key operating margin slipped to 9 percent in the quarter from 10.4 percent a year earlier, reflecting aggressive pricing and discounts on products as it competes with rivals like Dell Inc and Lenovo Group Ltd.<\/p>\n
Brian Alexander, an analyst with Raymond James, said the quarterly results showed “HP is still trying to strike a balance between growth and profitability.”<\/p>\n
Whitman, who took the helm a little more than a year ago, is trying to put HP back on the growth path though layoffs and focusing on businesses with longer-term potential, such as enterprise and remote computing services.<\/p>\n
“HP is cutting costs and headcount, but we believe challenges remain structural, with the company still tuned to selling high volumes of relatively low value-add products\/services, likely keeping margins under pressure,” Evercore analyst Rob Cihra said in a note.<\/p>\n
Overall revenue for the fourth quarter was $29.1 billion, beating the average analyst estimate of $27.9 billion, according to Thomson Reuters I\/B\/E\/S.<\/p>\n
HP maintained its full-year earnings forecast, which J.P. Morgan Securities analyst Mark Moskowitz said was “more than plenty good after Cisco’s big disappointment.”<\/p>\n
Moskowitz, who raised his price target to $30 from $29, said HP’s comments on PCs, printing and the enterprise group could suggest a potential bottoming in the company’s model, which could attract value-based and long-term investors.<\/p>\n
The company, which has been moving away from a declining PC industry, reported a smaller-than-expected drop in PC sales.<\/p>\n
“In short, HP didn’t guide down for 2014 and that is quite positive so far versus many in ‘old tech,'” Barclays analyst Ben Reitzes said in a research note. He raised his price target to $28 from $26.<\/p>\n
Some analysts were concerned a slowdown in China would hurt HP. Cisco had warned of weakness in China, while IBM’s sales in China declined in the latest quarter.<\/p>\n
But Reitzes said HP seemed to be managing volatility in emerging markets far better than its peers, noting revenue in the Asia Pacific region grew 4 percent in the quarter.<\/p>\n
Growth in the region was helped by a contract to supply laptops to the Indian state of Uttar Pradesh, which BMO Capital Markets valued at about $450 million. HP has not disclosed its value.<\/p>\n
Still, Evercore’s Cihra raised his rating to “equal-weight” from “underweight,” citing an improving balance sheet and a moderation in the decline of its PC and printer businesses. Evercore raised its price target to $25 from $20.<\/p>\n
Among the nine other firms raising price targets, three increased to $30. Credit Suisse was the biggest mover, with an increase to $30 from $25.<\/p>\n
HP shares hit a 12-month high of $27.77 on August 2. The stock hit its 12-month low of $12.22 in November last year.<\/p>\n
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