Dell, HP Earnings Expected to Rise: Report

By Nathan Eddy  |  Print this article Print

Dell and HP are rated outperform with price targets of $20 and $60 respectively, according to a research note.

Computer maker Dell (NASDAQ:DELL) and technology giant Hewlett-Packard (NYSE:HPQ) are expected to post gains and slight losses, respectively, in revenue growth in Dell’s second-quarter and HP’s third-quarter earnings reports, according to a research note from Bernstein Research.

Dell is expected to post revenues of $15.77 billion, representing a year-over-year increase of 1.5 percent. HP is expected to deliver revenues of $31.1 billion, for a 2.3 percent drop in YOY growth. Dell and HP received an outperform rating with price targets of $20 and $60, respectively.

The report also said Dell, due principally to a highly favorable component price environment, higher-than-expected share repurchases in Q2 and a continued focus by the company on higher margin/solutions oriented offerings, was given a higher consensus for 2012 earnings. However, analysts continue to believe that Dell's full-year revenue guidance is unrealistic.

"While we do worry about a potentially deteriorating macro-economic backdrop, which historically has led to underperformance in Dell's stock, we continue to like Dell as a near term trade, simply because we believe that Dell's valuation is compelling," the researchers noted. "While we struggle with how much multiple expansion (and how quickly) investors will afford Dell, given longer term concerns about its portfolio, and the likelihood that revenue expectations may be too high, we do believe that another quarter or two of continued strong margins at Dell will likely increase investors' estimates for what normalized baseline margins might be for Dell going forward."

The report said following two disappointing quarters, it is critical that HP meet Q2 expectations and reaffirm guidance for 2011, and investors should focus on services profitability and signs of competitive or margin pressure across HP's other business units. The note also expressed disappointment that the company had missed opportunities with its tablet offering, the TouchPad, which Bernstein analysts felt should have been offered at a more competitive price. While HP began to offer discounts in recent weeks and recently reduced the price of the TouchPad by $100 (to $399/$499), analysts worry that the price cuts signal weaker-than-expected sales and that strong discounting could discourage developers given that it suggests limited traction with customers.

"Given results for our covered companies that reported in July and our channel checks, we believe that enterprise demand was solid in the April-July timeframe, that public spending was weak but did not worsen, and that emerging markets remained robust," a senior analyst from Bernstein Research wrote. "Overall, we expect Dell and HP to deliver relatively in line (for HP) and modestly below (for Dell) consensus revenues this quarter, but materially stronger than expected earnings per share (EPS). Guidance is the key question, given uncertainty about government spending and the prevailing macro-economic backdrop, but we expect both companies to at least reaffirm EPS guidance."