<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> Analysis of HP's 4Q08 results  (Nov 19, 2008)

Annex Bulletin 2008-22                             November 19, 2008

A partially OPEN CLIENT edition


HP Fails to Lift Market (HP lifts page out of IBM playbook; "A Tale of Two Blues" updated)


Facts Fight Back Fears (IBM releases detailed third quarter results)



Updated 11/19/08, 10:45AM MST

HP Releases Preliminary Fourth Quarter FY08 Results

HP Fails to Lift Market

HP Takes Page Out of IBM Playbook; "A Tale of Two Blues" updated

"Where ignorance is bliss, 'tis folly to be wise" (Thomas Gray, 1716-1771)

SCOTTSDALE, Nov 19 HP took a page out Big Blue's playbook when it announced yesterday preliminary results for its fourth quarter of fiscal year 2008.  News was good.  Revenues were up 19% year-over-year, or 16%  adjusted for currency.  But without EDS, HP's revenue grew 5% on an organic basis, or 2% adjusted for currency.

So like IBM five weeks ago, HP tried to rush it to the beleaguered stock market ahead of the scheduled Nov 24 release date.  HP stock soared over 14 points to close at $33.59 yesterday.  Yet that still puts it down about 32% for the year, slightly better than the Dow Jones Industrials average, of which it is a part.  And just like IBM back in October (see "Fear Trumps Fact," Oct 9), HP failed to lift the market.  Its stock is down today half way through the trading session.  Once again, FEAR TRUMPS FACT.

"In a market driven by fear, logic and reason can be dangerous to your financial health," we said in our Oct 9 report.   Or, as Thomas Gray put it more than two centuries ago, "where ignorance is bliss, 'tis folly to be wise" (Thomas Gray, 1716-1771).  We added that, "there is a total disconnect at the moment between the stock market and the business fundamentals."

Ditto, ditto, ditto... we can add today, in the aftermath of HP's 4Q report.

IBM vs. HP: A Tale of Two Blues

Meanwhile, as we await the detailed business segment results, which HP is due to release on Nov 24, we thought we'd update our "Tale of Two Blues," which we originally published in June 2006.  Back then, like now, IBM stock was down in the dumps.  And the company tried to resuscitate it by inviting the Wall Street analysts to its first ever meeting in Bangalore, India.

Well, two-and-a-half years later, the picture is still the same.  IBM shares have had their run, peaking at about $130 in late July.  But now they are back down in the 70s, as they were when we wrote the first chapter of the "Tale of Two Blues." 

Yet, much has changed in the size and structures of the two blue companies.  For one thing, HP is now bigger than IBM.  With the EDS acquisition added to its current size, we figure that HP is now about a $130 billion company.  Our estimate of IBM 2008 revenues is around $108 billion. 

Because of HP's EDS and some software acquisitions since 2006, IBM and HP now compete across a broader spectrum of businesses.  Yet the overlap still accounts for only 46% of the HP revenues (vs. 40% in June 2006).  The $73 billion remainder are the PC and printing businesses that IBM does now compete in (see above charts).

As a result, despite HP's overall bigger bulk, IBM revenues are 2.3 times bigger than HP's in the business in which the two companies compete.  And IBM's net earnings from those operations are about 3.4 times larger than HP's. 

Summary & Outlook

So the IBM and HP figures may be a little different from 2.5 years ago, but the overall conclusions are the same.  IBM is both bigger and more profitable than HP, but you'd never know it if you compare the two stock charts.  The gun-shy Wall Streeters don't seem to care much for things like profits and margins anymore.  As we said back in October, "there is a total disconnect at the moment between the stock market and the business fundamentals."

So it's best to suspend logic and reason for the moment.  Eventually, however, Wall Street does tend to get things right.  So this is no time to panic and sell, as some "gurus" are urging. 

Jim Cramer, for example, of TheStreet.com and CNBC TV, wrote on Nov 13 that, "the past performance of IBM's stock is of no real importance when looking out two or three years. The reality is that there is a budget freeze in nearly every type of corporation around the planet, despite IBM management's assertion that long-term contracts will uphold margins. It may take considerably longer than a year for corporations to come back on line for IBM's products and services. So it's difficult to believe management's upbeat forecasts. History points to Big Blue as recession-sensitive (see The Good, The Bad and The Ugly, Nov 13)

Now, check out the two contradictory statements we highlighted in blue above.  Because Cramer has already made up his made that IBM is a bad investment, he is panning the past stock performance.  But then he uses the past when it suits his argument that IBM is "recession-sensitive."

Which reminds us of that famous trial lawyer who finished his summation to the jury with the following remarks: "And those, ladies and gentlemen of the jury, were the conclusions upon which I based my facts." :-)

Annex Clients: CLICK HERE for detailed IBM vs. HP tables & charts

Happy bargain hunting!

Bob Djurdjevic

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Volume XXIII, Annex Bulletin 2008-22
November 19, 2008

Bob Djurdjevic, Editor
e-mail: annex@djurdjevic.com

8183 E Mountain Spring Rd, Scottsdale, Arizona 85255
Tel/Fax: +1-602-824-8111

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