As most of the firms on Wall Street queue up to report their first-quarter numbers, computer maker Hewlett-Packard (NYSE:HPQ) is once again a step ahead of the pack. When reporting its earnings news tomorrow, it will already be moving on to fiscal Q2 2007.

What analysts say:

  • Buy, sell, or waffle? Twenty-nine analysts follow HP, with 19 of them now rating the stock a buy, seven a hold, and three still saying sell.
  • Revenues. On average, they expect to see 12% sales improvement to $25.23 billion.
  • Earnings. Profits are predicted to rise 26% to $0.68 per share.

What management says:
Just one week ago, HP updated investors on what to expect in tomorrow's news by raising its revenue target to a minimum of $25.5 billion (exceeding consensus analyst estimates), and predicting EPS of $0.64 to $0.65.

What's that, you say? Why are revenues better than expected, but earnings worse? Well, they may not be. One recurring problem with "consensus analyst estimates," whether you obtain these from, Thomson, Reuters, or Yahoo! Finance, is that you never know precisely what kind of earnings estimates are being quoted to you. They might be GAAP, like HP's latest prediction, but more likely are some flavor of pro forma (Latin for "it means what I say it means"). If, for example, the consensus number quoted by Yahoo! Finance refers to pro forma earnings, then HP has in fact raised earnings guidance. Under its definition of "non-GAAP diluted earnings per share," which exclude $0.05 in costs for goodwill amortization, management expects to earn $0.69 to $0.70 -- a bit above analyst expectations.

What management does:
As we've come to expect, it seems everything at HP is going onwards and upwards. Last quarter, the firm once again boosted its rolling margins at each of the gross, operating, and net levels -- the seventh straight quarter it has accomplished this feat. On an operating basis, the firm is more profitable than archrival Dell (NASDAQ:DELL), at 6.8%; more profitable than third-string player Gateway (NYSE:GTW), at 0.2%; and lagging only less comparable major computer businesses like IBM (NYSE:IBM) and Apple (NASDAQ:AAPL), both of which earn operating margins comfortably within the double digits.





























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 addition to the second quarter guidance already discussed, management issued guidance for the third quarter already under way last week. Third-quarter revenues are expected to come in sequentially lower at $23.7 billion to $23.9 billion, with GAAP income of $0.59 to $0.61 per share. For future reference, if analysts say anything much different than that, they're most likely working off of the firm's pro forma guidance for the third quarter, which doesn't count $0.04 worth of goodwill amortization, and which should yield estimates somewhere north of $0.63 per share.

Another thing to watch in the future, and this one has nothing to do with analysts cribbing their work from management's own press releases, is the balance sheet. As mentioned in each of my last two Foolish Forecasts, HP's got a worrisome trend going with respect to growth of accounts receivable and inventories relative to sales. Reviewing the last two quarters' results, for example, we can see that sales have been up 9% year over year on average, while A/R rose 14%, and inventories 18%.

It's high time HP management reversed this trend. If tomorrow's news doesn't show this to have happened already, then it must happen soon. Else, obsolete inventory will eventually have to be moved, and likely moved at a discount (or written down in value a la Cisco circa 2001). Long story short, if HP is to keep its beautiful line of improving margins rising, it needs to address the threat looming on its balance sheet.

What did we expect from HP last quarter, and what did we get? Find out in:

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Fool contributor Rich Smith does not own shares of any company named above.