It's been three full years since Hewlett-Packard (NYSE:HPQ) last packed fewer profits into a quarterly earnings report than analysts had expected. As we look forward to Thursday's Q3 report, our questions are twain, but related: How much longer can this company continue to excel? And when will the analysts wise up?

What analysts say:

  • Buy, sell, or waffle? Twenty-eight analysts follow HP, with 20 of them now rating the stock a buy, six a hold, and two a sell. More than 90% of the Motley Fool CAPS community gives it a thumbs up.
  • Revenues. On average, analysts expect to see 10% sales improvement to $24.06 billion.
  • Earnings. Profits are predicted to rise 25% to $0.65 per share.

What management says:
The big news out of HP this quarter was last month's announced purchase of data center automation software company Opsware (NASDAQ:OPSW), to BladeLogic's (NASDAQ:BLOG) great delight. Read why here.

Assuming the purchase wins shareholder approval, HP will be paying $14.25 per share cash, putting Opsware's enterprise value at $1.6 billion. What convinced HP that it was a good idea to pay 14 times revenues for a subsidiary, when HP's own stock is valued at just 1.3 times sales? Well, according to Opsware CEO Ben Horowitz, "We are about to see one of the biggest application and [data center] infrastructure build-outs in history. The addition of Opsware to the HP Software portfolio will make HP the obvious choice for powering the next generation of data centers to come."

What management does:
Hmm. I have to admit that I'm pretty skeptical about the price of this one. Convince me, HP. Show me some numbers that prove you know what you're doing.

Margins

1/06

4/06

7/06

10/06

1/07

4/07

Gross

23.5%

23.8%

24.2%

24.4%

24.5%

24.5%

Operating

6.2%

6.9%

7.5%

8%

8.2%

8.5%

Net

3.1%

4.1%

5.5%

6.8%

6.9%

6.6%
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:
Well, all right. I guess that is at least suggestive. Gross margins are generally rising, operating margins most definitely so, and only the net seems to have been hit last quarter by a one-two punch from both higher taxes and a $453 million restructuring charge. For comparison, HP boasts operating margins higher than PC-making rivals such as Dell (NASDAQ:DELL) and Sony (NYSE:SNE). It does, however, lag rivals such as IBM (NYSE:IBM) and Apple (NASDAQ:AAPL), both of which earn operating margins comfortably within the double digits.

Meanwhile, in my continuing effort to pound my head through the wall on the issue of working capital management, I see zero improvement in the issues that I've discussed for the past several quarters: Inventories and accounts receivable growth. HP grew sales at 12% in the first half of this year, right? Yet inventories grew 7.5% on average, and accounts receivable 19%. I don't know whether it's channel-stuffing we're seeing here or not. But I'm pretty darn sure that it's the reason why HP's free cash flow is down more than 50% year over year.

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. The Fool's disclosure policy always exceeds expectations.