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HP's Numbers Aren't as Good as They Look

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Man, Hewlett-Packard (NYSE: HPQ  ) couldn't have timed its acquisition of consulting firm EDS any better.

That $14 billion barnstormer deal closed Aug. 26, 2008. Since then, HP has been happy to report relatively strong year-over-year sales, because the extra cash from old EDS customers has been enough to outweigh slower sales elsewhere in the massive HP machine.

And next quarter, when HP gets to compare apples to apples once again, the results will overlap with the start of the Great Panic of 2008. The numbers won't be that hard to beat. If HP had placed that cut-over point any closer to late September, it would just have looked suspiciously good.

So with the help of EDS, HP reported $27.5 billion of third-quarter revenue. That's down 2% from the year-ago period. Oops, silly me -- adjust for currency effects and you get 4% growth instead. There, that's much better. Non-GAAP earnings per share bounced up by $0.05 to $0.91.

CEO Mark Hurd said that "HP's performance this quarter is a result of our strong business portfolio, efficient cost structure and scale." Back out the hefty but unspecified contributions from EDS, and he'd be singing a different song. HP is practicing "growth by acquisition" in the grand tradition of Oracle (Nasdaq: ORCL  ) and Cisco Systems (Nasdaq: CSCO  ) .

When you break HP down into its component parts, you have to wonder about the company's strength in each sector. The enterprise storage and servers segment saw 23% lower sales than in 2008, while chief storage rival EMC (NYSE: EMC  ) dropped just 11%. IBM's (NYSE: IBM  ) equivalent segment lost 25% of its sales, so all is not lost. But IBM beats up on HP in the software segment with a mere 8% annual drop against HP's 22%.

The consumer-oriented computer business fell just 18% to $8.4 billion, despite a small uptick in unit volumes and a global market-leading stature. We'll have to wait another week to see how Dell (Nasdaq: DELL  ) stacks up there -- but third-party reports say that Dell shipped fewer systems this summer, so things are looking up for HP here.

HP remains a colossus of the technology industry, but its feet may be made of clay. If you held a gun to my head and told me to pick a tech giant to buy today, I'd probably go with EMC or Google (Nasdaq: GOOG  ) , simply because their businesses seem much more stable than HP's.

Who would you pick, dear Fool? Let me know by email, or drop a note in the comments box below.

Google is a Motley Fool Rule Breakers selection. Dell is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in Google, but he holds no other position in any of the companies discussed here. Anders enjoys comparing kumquats to plantains in his spare time. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 19, 2009, at 3:34 PM, Netteligent09 wrote:

    House Builders, Retailers, HP and tech stocks are speculative, high risk, and manipulative.

    Given market condition, outlook, and weak earnings & profits, stocks were up...Simply amazing.

    Housing is not a bubble until it bursts.!!

  • Report this Comment On August 19, 2009, at 4:24 PM, nhmeanie wrote:

    Too bad employees took anywhere from 2.5 to 5% pay cuts in the second quarter of this year, went a whole month of 10% pay cut in the third quarter and are taking a much more substantial pay cut in the fourth quarter (10 to 40%) w/more reductions scheduled for next year (not to mention benefits drop).

    Though this could mean better return for value for stock holders, think again. Where do you think employee loyalty is at HP now (besides an all time low)? Read online blogs (google it). IT employees used to being compensated for their proactive thinking will become more reactionary and less apt to go to bat for the company that screwed them.

  • Report this Comment On August 19, 2009, at 10:13 PM, ds10 wrote:

    nhmeanie appears to have forgotten that the world has

    undergone a slight financial tremor this past year.

    US unemployment is close to 10%. Rather than lay off

    employees, HP has chosen to make a reduction--and a small one at that--in salaries. I doubt there are many employees who would rather be terminated than take this incremental decrease in pay.

    Future reductions are not written in stone. Let's wait

    and see how HP does in the near future before

    condemning and excellent company.

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