Foolish Forecast: Will HP Hit Pay Dirt?

My word, Hewlett-Packard (NYSE: HPQ) is staying busy these days. One week after announcing the $14 billion acquisition of service specialist Electronic Data Systems (NYSE: EDS), HP is set to report second-quarter earnings on Tuesday night.

What Fools say:
Here's how HP's CAPS rating stacks up against some of its peers and competitors:

	Market Cap (billions)	Trailing P/E Ratio	CAPS Rating (out of 5)
International Business Machines (NYSE: IBM)	$175.2	16.6	***
Hewlett-Packard	$117.4	16.2	****
Canon (NYSE: CAJ)	$68.0	15.5	*****
Dell (Nasdaq: DELL)	$43.3	16.1	**
Sun Microsystems (Nasdaq: JAVA)	$10.5	17.9	***

Data from Motley Fool CAPS and Yahoo! Finance as of May 19.

CAPS player ChannelDunlap notes that HP is the "#1 PC Manufacturer in the world, and growing. But since everything that goes up must come down (ie, they won't be #1 forever), I like the EDS deal giving them more opportunities in different markets."

On the bearish side of the fence, OnyongJun sees the EDS deal in a different light: "After draining the EDS swamp HP could find a landscape of snapping alligators capable of taking it down the drain." Ouch.

In total, we've seen two negative CAPS commentaries about the EDS deal, but 26 positive ones. I think it's safe to say that your fellow investors like the move.

What management does:
HP has an unbroken streak of 11 quarters in a row of increasing operating margins. The accelerating sales streak is a bit shorter, stopping at five quarters, but still impressive.

Margins	10/2006	1/2007	4/2007	7/2007	10/2007	1/2008
Gross	24.3%	24.4%	24.3%	24.2%	24.4%	24.5%
Operating	7.4%	7.6%	7.9%	8.2%	8.4%	8.8%
Net	6.8%	6.9%	6.6%	6.8%	7.0%	7.3%
FCF/Revenue	9.6%	7.1%	7.2%	6.0%	6.3%	9.2%

Growth (YOY)	10/2006	1/2007	4/2007	7/2007	10/2007	1/2008
Revenue	5.7%	7.0%	9.2%	11.7%	13.8%	14.4%
Earnings	158.5%	143.0%	76.9%	38.2%	17.2%	20.4%

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

One Fool says:
With EDS under its belt, HP is looking a lot like a carbon copy of Big Blue. You certainly could pick worse businesses to serve as a template for your own, and IT services tend to come with handsome profit margins and a nearly guaranteed eternal revenue stream.

As for this quarter, the signals are mostly positive. IBM is doing fine, and Sun somehow manages to grow without a coherent business strategy. While printer rival Canon reported a weak quarter, that owed more to a stronger yen than poor unit sales. HP swings in the other direction, and it should be helped by a weakening dollar. Expect good news, and a continued recovery from last week's acquisition-related value drop.