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Hewlett Packard Company (HPQ) is scheduled to announce its fourth quarter 2011 results on October 21, 2011, and we do witness some variation in analysts’ estimates at this point.

Third Quarter Overview

The company reported third quarter 2011 earnings per share (EPS) of $1.10, exceeding the Zacks Consensus Estimate. However, revenue of $31.2 billion inched up 1.0% on a year-over-year basis. The company witnessed revenue growth across most of its business segments, except the Personal Systems Group (PSG) and Imaging and Printing Group (IPG). Moreover, the company is undertaking several constructive steps to emerge as the leader in the evolving information economy.

Moreover, HP announced that its board of directors has authorized the exploration of strategic alternatives for the company's Personal Systems Group. HP will also consider a broad range of options including full or partial separation of PSG from HP through a spin-off or other transaction.

Revenue from the overseas markets accounted for 65.0% of the total revenue in the reported quarter. The BRIC countries (Brazil, Russia, India and China) generated revenues of $3.7 billion, up 12.0% year over year and contributed 12.0% to the total revenue.

Diluted earnings per share on a GAAP basis were 93 cents in the third quarter compared with 75 cents in the prior-year quarter. Non-GAAP EPS stood at $1.10, compared with $1.08 in the prior-year quarter.

For the fourth quarter of fiscal 2011, HP estimates revenues in the range of $32.1 billion to $32.5 billion. Diluted EPS on a GAAP basis is expected in the range of 44 cents to 55 cents, while non-GAAP diluted EPS is projected at between $1.12 and $1.16. For fiscal 2011, the company expects revenues in the range $127.2 billion to $127.6 billion. GAAP diluted EPS is expected in the $3.59 to $3.70 range, while diluted EPS on a non-GAAP basis is estimated at between $4.82 and $4.86.

Agreement of Analysts

Out of the 23 analysts providing estimates for the fourth quarter, only two analysts raised their estimates while two analysts lowered over the last 30 days. However, the last 30 days saw no estimate revisions. Again, for fiscal 2012, only one analyst raised the estimate in the last 30 days, while five analysts lowered during the same period.

Some of the analysts have lowered their forward revenue and non-GAAP EPS estimate ahead of the fourth quarter 2011 results. The negative sentiment is mainly on account of analyst expectations that HP will report results at the low end of its guidance range. This reflects the severe shortage of HDDs that analysts anticipate in the coming months, as the recent flood may hamper production in Thailand. This is expected to negatively impact units, revenue and margins for the next few quarters, although PC price increases could compensate the margin impact and that HP will likely be better positioned in terms of securing supply relative to other PC vendors.

Some analysts are optimistic on the decision taken by the company to continue with its PC business. The analysts believe that the PC segment offers better cost management, financial leverage and free cash flow.

On the other hand, the analysts also believe that HP is facing significant competition in the printing space given the continuous roll out of printing devices at competitive prices by other technology giants including Samsung, Canon (CAJ), Epson, and Lexmark (LXK). This may initiate a price war in the printing space, which may hurt HP’s margins to a certain extent.

Magnitude of Estimate Revisions

There has been some revision in estimates, since the company reported its third quarter 2011 results. The estimates for the upcoming quarter have remained constant, over the last 90 days at $1.13 (current). For the January quarter, estimates reduced by 17 cents to $1.12 over the last 90 days.

For fiscal 2011, estimates have slipped by a penny over the last 90 days. For 2012, estimates have gone down from $5.31 to $4.61 (current) over the last 90 days. The same moved down by 11 cents over the last 30 days.

Recommendation

Hewlett-Packard dominates the computing world with its strong business model and leadership position in both PC and Server segments. Management’s decision to keep its PC business looks prudent.

On the other hand, HP is expected to witness significant shortage in hard disk supply, as a result of the recent flood in Thailand. Since prices of this key ingredient will shoot up as a result, not just HP, but also Apple Inc. (AAPL) and Dell Inc. (DELL) could see the impact on their margins.

The shares carry a Zacks rank of #3, indicating a short-term Sell recommendation.

 
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