How Hewlett-Packard Is Keeping Its Comeback on Track

On Wednesday, Hewlett-Packard (HPQ +4.00%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever surprises inevitably arise. That way, you'll be less likely to have an uninformed, knee-jerk reaction that turns out to be exactly the wrong move.

As its shares moved sharply downward in 2012, Hewlett-Packard drew criticism from many investors that it no longer deserved a place among the Dow Jones Industrials (^DJI +0.59%), considering that several other large tech companies had been left out of the index. But even in light of further weakness in the PC business, HP has made substantial strides in executing its long-term turnaround strategy of seeking a broader mix of more profitable businesses. Let's take an early look at what's been happening with Hewlett-Packard over the past quarter and what we're likely to see in its quarterly report.

Stats on Hewlett-Packard

Source: Yahoo! Finance.

How will HP's earnings fare this quarter?
Analysts have gotten a lot more enthusiastic about HP's prospective earnings in recent months, raising their views for the just-ended quarter by $0.04 per share and increasing their full-year estimates for the current fiscal year by more than four times that figure. The stock has responded similarly, gaining more than 25% since mid-February.

HP's huge progress lately owes to its attempt to move beyond the struggling PC industry, which has seen its prospects continue to wane in light of the rise of mobile devices like smartphones and tablets. With first-quarter PC demand falling between 11% and 14% from year-ago levels, the PC business increasingly appears to be a dead end. And HP now makes less than 10% of its earnings from PC sales, so the company is on the road to making PCs largely irrelevant to its overall success.

But HP's turnaround depends largely on industry conditions that are beyond its control, and some worry that those conditions are starting to deteriorate under the weight of heightened competition. When rival IBM (IBM +0.17%) announced its earnings last month, it suffered from weak sales in IT hardware like servers, a niche in which it has shown substantial strength in the past. With HP looking to its own server division to help boost its growth, these negative signs from the industry are definitely unwelcome.

Perhaps the most intriguing prospects for HP are far down the road. Earlier this month, activist investor Carl Icahn, who is fighting hard to put together a potential buyout of HP rival Dell (DELL +0.00%), said he believed a Dell-HP merger would make sense for both companies at some point in the future. Given the smack talk between the two companies recently, a merger would inevitably involve a lot of corporate culture shock. More importantly, considering the companies' strengths in such similar areas, it's unclear whether the move would help HP broaden its business into more lucrative areas.

In HP's report, look closely for a long-range progress report from CEO Meg Whitman on the direction the company is likely to take. Given so many avenues for potential growth, it's essential that HP chooses the right path if its turnaround story is to have a happy ending.

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