HP's Pyramid Growth: Fool by Numbers

On Aug. 16, all-around computing giant Hewlett-Packard (NYSE: HPQ  ) released third-quarter earnings for the period ended July 31, 2007.

  • These results are essentially identical to last quarter's. That's impressive, because Q3 is traditionally HP's weakest quarter of the year, with a 3% sequential revenue drop last year.
  • It's a good sort of pyramid: Start with some earnings growth, build out net margins in the middle, and anchor it all with a generous share buyback. That's how you get swifter growth at every step of our income statement rundown below.
  • The personal-computer segment outgrew all other divisions, at a 29% clip, as HP cements its newfound market-share lead over Dell (Nasdaq: DELL  ) . But all areas grew on an annual basis, both in revenue and operating margin. Well, except for the smallish and not-so-core financial-services operation, which stayed flat.
  • Take away the effects of changing currency exchange rates, and revenue growth was a mere 12%. HP pulls in 65% of its sales from outside the United States, and clearly stands to benefit from a weakening dollar.

(Figures in millions, except per-share data)

Income Statement Highlights

Q3 2007

Q3 2006

Change

Sales

$25,377

$21,890

15.9%

Net Profit

$1,778

$1,375

29.3%

EPS

$0.66

$0.48

37.5%

Diluted Shares

2,697

2,839

(5.0%)

Get back to basics with the income statement.

Margin Checkup

Q3 2007

Q3 2006

Change*

Gross Margin

24.5%

24.8%

(0.3)

Operating Margin

8.3%

6.9%

1.4

Net Margin

7.0%

6.3%

0.7

*Expressed in percentage points.

Margins are the earnings engine.

Balance Sheet Highlights

Assets

Q3 2007

Q3 2006

Change

Cash + ST Invest.

$12,490

$15,995

(21.9%)

Accounts Rec.

$11,845

$9,631

23.0%

Inventory

$8,006

$7,464

7.3%

Liabilities

Q3 2007

Q3 2006

Change

Accounts Payable

$11,673

$10,695

9.1%

Long-Term Debt

$4,945

$2,451

101.8%

The balance sheet reflects the company's health.

Cash Flow Highlights

Q3 2007

Q3 2006

Change

Cash From Ops.

$1,867

$2,629

(29.0%)

Capital Expenditures

$548

$389

40.9%

Free Cash Flow

$1,319

$2,240

(41.1%)

Owner Earnings

$1,915

$1,584

20.9%

Free cash flow is a Fool's best friend.

Dell is both a Motley Fool Inside Value pick and a Motley Fool Stock Advisor recommendation.

Related Foolishness:

Fool by Numbers is designed to give you the raw earnings information in a timely fashion, putting all the numbers you need in one easy-to-read place. But at The Motley Fool, we believe numbers tell only part of the story, so check Fool.com for more of our in-depth discussion of what the numbers mean.

At the time of publication,Anders Bylund had no position in any company mentioned. Fool rules are here.


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