Blink and You'll Miss HP's Weakness

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Wanna know the difference between merely "good" and "great" management? Hewlett-Packard (NYSE: HPQ) and age-old rival IBM (NYSE: IBM) just showed us. In something of an upset, Mark Hurd didn't come out on top.

You saw IBM's show of strength earlier this earnings season: Currency-adjusted sales stayed nearly flat year-over-year, and earnings per share expanded by 17%. Given the economic backdrop of worldwide financial upheaval, I think it's fair to call that a great performance.

Fast-forward to last night, when HP reported its own results. Revenue improved by 1% from the year-ago period to $28.8 billion. Non-GAAP earnings expanded by 8% to $0.93 per share. Just as good, right? Maybe even better?

Dream on. Those numbers sure sound sweet, until you factor in the $14 billion blockbuster deal from last May, when HP bought tech support specialist Electronic Data Systems. Almost all of HP's supposed strength is a masterful illusion this time. Look at the segment breakdown and see if you can figure out where EDS fits in:

Company segments	Revenue	Y-O-Y Revenue Change
Personal systems	$8.8 billion	(19%)
Services	$8.7 billion	116%
Imaging and printing	$6.0 billion	(19%)
Enterprise storage and servers	$3.9 billion	(18%)
Software	$878 million	(7%)
Financial services	$636 million	(1%)

For the record, EDS reported sales of $5.8 billion in the comparable period a year ago and contributed about $4.9 billion this time. Back out the acquired sales and you get about a 16% overall sales swoon instead. The company as a whole also reported that GAAP earnings shrank by 6% to $0.75 per share and free cash flow dwindled from $2.6 billion last year to $300 million this time.

Not so impressive anymore, is it?

Sure, the economy is affecting everybody, especially companies as big and sprawling as HP. But HP did its best to hide the ugly numbers, putting positive non-GAAP figures front and center and mentioning EDS only once in the earnings narrative. "Services revenue increased 116% to $8.7 billion due primarily to the EDS acquisition." That's it. It's up to us to figure out that the emperor really is naked.

The real difference is that companies like HP or Texas Instruments (NYSE: TXN) hide behind platitudes like "tough market" and "realigning our expenses" while sweeping the bad news under the thickest carpet available. Real stars like IBM and Google (Nasdaq: GOOG) have long-term plans for any environment and don't need to hide.

That's the difference between good and great, Mark. Long-term planning beats fighting short-term fires and smooth-talking to investors. Every time.

Further Foolishness:

• 3 Reasons to Sell HP Today
• The Stocks That Won (and Broke) Our Hearts
• The Top Stocks of the Next 50 Years