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A SPECIAL ANNEX NEWSFLASH
Analysis of HP's Preliminary Third Quarter Results
Savaged by Wall Street
Snatching Defeat from Jaws of Victory: Third-worst Stock Price Drop Follows Near Doubling of Net Profit!?
PHOENIX, Aug 12 - The way Wall Street savaged the Hewlett Packard (HP) stock today, you'd think the company was in big trouble. About $10 billion of the company's market cap evaporated in less than a day, following HP's announcement of its third quarter results. The 17.6% decline (at the lowest point of the day) was the third-worst drop in HP's history (the worst being on Sep 4, 2001, when the company announced its plan to buy Compaq).
And what actually happened? HP's net profit nearly doubled in the quarter. Its revenues grew by 9% since a year ago, with all but one of its business units contributing to the growth. In fact, four of the six HP business units grew in double digits. And the fifth one, the Imaging and Printing Group, whose revenue which rose by 8%, set a new record for the third quarter operating profit of $837 million, with a 15% operating margin.
The only unit that under-performed the market and the HP expectations was the Enterprise Storage and Servers operation, whose revenues were down 5% since a year ago. The unit also racked up $208 million in operating losses. But since this morning's HP announcement focused on the trouble in that unit and the management changes that the HP CEO Carly Fiorina swiftly implemented, the news exploded like a bombshell on Wall Street, scaring investors and traders into panicked reactions.
And what were the changes?
As for Messrs. Blackmore, Milton and Rorsted, "they are seeking new opportunities" (outside of HP), according to a company spokesman.
Asked by a reporter what we thought of the management changes at HP, we replied:
"Internally, Carly's changes will
signal resoluteness and decisiveness in the face of problems. Also, that
sub-par performance won't be tolerated. But externally, the stock
market reaction was excessive, to say the least. After all, it was only
one unit that under-performed. The company as a whole doubled its
earnings since a year ago. There was no reason for panic.
It is rare to see such a flagrant example of snatching defeat from the jaws of victory (see (also see "CEOs: Beware Your CFOs," June 2004). Judged by the third quarter facts alone, HP actually did very well in the latest period.
Its chief PC rival, for example, Dell, which announced its earnings after the market closed today, is being hailed for having grown its profit by 29% in the latest period, versus a 97% surge by HP. Dell's stock is up almost two points in after-hours trading while HP's has been savaged.
Somebody ought to pay for that, besides HP shareholders. If sub-par performance is not to be tolerated.
Over to Carly...
Happy bargain hunting!
For additional Annex Research reports, check out...
2004 IT Services: HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004); IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004); IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)
2004 IT Services: HP, CSC: Keeping Faith, Losing Faith (Apr 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004); IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)
2003 HP: "IBM vs. HP: And the Winner Is..." (Nov 2003); "Strong Finish Not Enough" (Nov 2003) "An HP Hat Trick (March 2003); EXCERPTS - Analysis of Hewlett Packard Services FY02 results (May 2003); 2003 Global IT Services Heptathlon (May 23, 2003); Analysis of “Top 10” IT Leaders’ Market and Business (June 2003)