Foolish Forecast: HP Stands for Hefty Profits

So the first earnings season of the new year is finally starting to wind down ... must be time to start up the second earnings season of the new year, eh? Now that most of the Q4 2007 news is out of the way, Hewlett-Packard (NYSE: HPQ) gets us started on 2008 with a look at its fiscal Q1 2008 news on Tuesday.

Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

• Buy, sell, or waffle? Twenty-five analysts still follow HP, down three from last quarter. Fully 21 of those remaining rate the stock a buy, however, while the others say to hold.
• Revenues. On average, they expect to see 10% sales improvement to $27.6 billion.
• Earnings. Profits are predicted to rise 25% to $0.81 per share.

What management says:
HP CEO Mark Hurd gave himself another pat on the back last quarter, praising his firm's "strong performance across our businesses" and predicting "further progress in the marketplace" going forward. And in accordance with the old saw that actions speak louder than words, Hurd's board authorized another $8 billion worth of stock repurchases this year, topping off the $11 billion spent last year.

Elsewhere in the comp sector ... similar news. As fellow Fool Anders Bylund pointed out back in November, IBM's (NYSE: IBM) on the buyout wagon, too, as are Sun (Nasdaq: JAVA) and Dell (Nasdaq: DELL).

What management does:
Can you blame them? H-P's stock price may be stuck in neutral, rising barely 2% over the entire past year, but its profitability just keeps growing. I mean, just take a look at these margin trends:

Margins	7/06	10/06	1/07	4/07	7/07	10/07
Gross	24.1%	24.3%	24.4%	24.3%	24.2%	24.4%
Operating	7%	7.4%	7.6%	7.9%	8.2%	8.4%
Net	5.5%	6.8%	6.9%	6.6%	6.8%	7.0%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
In case you're wondering, yes, everybody else buying back shares is doing similarly well, profits-wise. Operating margins are on the rise at IBM, Sun, and Dell as well. But does the fact that H-P's getting better mean the stock itself is objectively good?

I could actually argue either way. On the plus side, H-P's trading for 16 times trailing earnings, and a forward P/E of about 11.6. Can't very well fault H-P for paying a fair price, right?

But on the other hand, with free cash flow amounting to $6.6 billion over the last 12 months, H-P's actually about 9% less profitable on a free cash flow basis than when you value it on its GAAP earnings. So really, the decision to buy this one is something of a toss-up. Perhaps a better use of H-P's cash would be to scoop up an unprofitable revenue stream in an adjacent area of business -- say, Cray (Nasdaq: CRAY), which disappointed us mightily yesterday -- and teach those guys how to turn their revenues into profits the H-P way.

Read more about Hewlett-Packard in:

• HP Is Worth More
• Printing Money at HP: Fool by Numbers
• HP's Pain-Free Future