3 Reasons Not to Panic Over Hewlett-Packard's Earnings Report

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Hewlett-Packard (NYSE: HPQ  ) put a hurting on investors today. Share prices plunged as much as 14% overnight due to a disappointing third-quarter earnings report. The price drop slashed 27 points off the Dow Jones Industrial Average (DJINDICES: ^DJI  ) .

But every storm cloud comes with a silver lining, right? Here's a rundown of three big reasons not to panic over HP's report.

These results really weren't all that disappointing
Analysts were hoping for adjusted earnings of $0.86 per share on $27.3 billion in total sales. And HP delivered, with earnings exactly in line with analyst estimates and revenue just $100 million below the Street figure.

Moreover, management tightened the earnings outlook for 2013 to a range between $3.53 and $3.57 per share. That's smack in the middle of the former, wider range, and it's exactly in line with Wall Street estimates. So the fourth quarter's bottom line is shaping up exactly as planned.

CEO Meg Whitman would agree with that conclusion. "I remain confident that we are making progress in our turnaround," she said in a statement. "We are already seeing significant improvement in our operations, we are successfully rebuilding our balance sheet, our cost structure is more closely aligned with our revenue and we have reignited innovation at HP, with a focus on the customer."

Whitman's cost controls are working
Revenue fell 8% year over year, but HP never resorted to the ultimate panic strategy of deep discounts in the hunt for revenue targets. Product prices remained firm, and Whitman is whittling away at HP's bloated cost structures. The result: Non-GAAP earnings jumped 29% higher year over year, despite lower sales.

The turnaround story is far from complete, but Whitman does seem to have her company on the right track here.

It's just a flesh wound!
There's no question that a 14% single-day drop hurts investors -- in the short term. But HP owners have very little to complain about if you stretch your investing horizon out a bit.

After this radical adjustment, share prices are roughly back to where they were three months ago, just before HP delivered a positive surprise in the second quarter. The stock has taken a tumultuous route to get here, but it has just about matched the Dow's one-year returns. And it's hard to complain about a 56% gain so far in 2013, absolutely crushing the Dow and other market benchmarks.

HPQ Chart

HPQ data by YCharts.

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  • Report this Comment On August 22, 2013, at 2:28 PM, pjensen9 wrote:

    HPQ is a good opportunity long term. They have more revenue than IBM even if it dips a bit. But their valuation is 20% of IBM. Since both companies are so big that it's hard to significantly outperform on the top line, it becomes an exercise in restoring profitability. If Meg can get close to IBM's margin, there's a lot of upside in the stock.

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