Hewlett-Packard was the Wall Street tech star this week, reporting strong earnings as the Nasdaq Composite Index closed down eight days in a row for the first time in five years.
HP on Tuesday reported stronger-than-expected earnings mainly due to sales of high-margin PCs and printers. This is welcome news for the hardware market, where growth is expected to slow down this year. But the upbeat announcement did not have a halo effect on other tech companies.
This week, the Nasdaq index slipped below its starting point this year. The Nasdaq is a barometer for confidence in the tech sector since so many IT stocks are traded on the exchange. The main culprit for the drop was the fear of inflation in the U.S., showing once again that macroeconomic forces trump sector-specific issues. U.S. Labor Department figures showed that consumer prices rose faster than forecast last month.
HP managed to look good throughout the turmoil of the week, however. Company shares closed Wednesday, a day after the earnings announcement, at $32.16, up $1.05 for the day. Excluding one-time charges, the company reported profit of $1.6 billion for the second quarter, or $0.54 per share. Analysts has expected $0.49.
The profit was fueled by a 27 percent rise in laptop sales and a 5 percent rise in printer sales. Though the specter of a price war with Dell has been a topic of conversation among investors for the past few weeks, there are signs that HP is in shape to weather this potential storm.
First of all, Chief Executive Officer Mark Hurd's restructuring plan, announced last July, is well under way. The company workforce declined by 1,600 in the quarter. Further savings will be gained by a move, announced this week, to collapse 85 data centers into six, which should reduce costs by about $1 billion.
But more important, the company is benefitting not only from cost cuts, but from better execution all around. Better supply chain management has helped the company get close to Dell's vaunted efficiency levels in inventory, for example.
As HP closes in on Dell's global PC market share, the good news suggests that the company, under Hurd, is finally starting to come alive after being in the doldrums in the wake of its acquisition of Compaq four years ago. Ironically, though the company board fired Hurd's predecessor Carly Fiorina last year, her vision -- achieving cost efficiencies and market dominance by bulking up -- may finally be coming to fruition.
Significantly, Dell's forecast growth for the rest of the year, about 6 percent, is only slightly higher than HP's. This is not a good thing, taking into account the fact that Dell is growing from a much smaller base. The smaller the base is, the easier it is to grow, in terms of percent.
Dell's earnings announcement Thursday was something of a foregone conclusion, since the company issued an earnings warning last week. Profit for the quarter was $762 million, down 18 percent from $934 million one year earlier. As rivals like HP get better at logistics, Dell finds that it needs to cut prices and margins to keep its market-leader position. The company's announcement that it would start to use AMD chips for the first time lifted company shares, however. In pre-market trading Friday morning, Dell shares (DELL) ticked upward by $0.75.