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HP shares jump on turnaround hopes; margins a concern

Meg Whitman, chief executive officer and president of Hewlett-Packard, speaks during the grand opening of the company's Executive Briefing C
Meg Whitman, chief executive officer and president of Hewlett-Packard, speaks during the grand opening of the company's Executive Briefing C

By Poornima Gupta and Neha Alawadhi

(Reuters) - Hewlett-Packard Co shares soared near their 52-week high on Wednesday after investors saw signs a turnaround plan was gaining traction, but Wall Street worried the improvement was coming at the expense of margins.

HP shares jumped nearly 10 percent to $27.56 in afternoon trading, after at least one brokerage raised its rating on the PC maker's shares and another nine raised their price targets.

Expectations had been low for HP's fourth quarter following a disappointing third quarter and after rivals IBM and Cisco Systems Inc reported poor results.

But HP surprised on Tuesday, reporting stronger-than-expected revenue due to growth in its enterprise group, which supplies servers, storage and networking products to corporations.

"HP appears to continue to struggle with improving its margins and share together, despite substantial cost cuts - particular in its enterprise business - and we worry about profitless prosperity," Bernstein Research analyst Toni Sacconaghi said in a note to clients.

Chief Executive Meg Whitman said Tuesday the company needed to improve margins, even as HP's enterprise sales rose 2 percent compared with a year earlier and 12 percent versus the previous quarter.

The cause for concern was that its key operating margin slipped to 9 percent in the quarter from 10.4 percent a year earlier, reflecting aggressive pricing and discounts on products as it competes with rivals like Dell Inc and Lenovo Group Ltd.

Brian Alexander, an analyst with Raymond James, said the quarterly results showed "HP is still trying to strike a balance between growth and profitability."

Whitman, who took the helm a little more than a year ago, is trying to put HP back on the growth path though layoffs and focusing on businesses with longer-term potential, such as enterprise and remote computing services.

"HP is cutting costs and headcount, but we believe challenges remain structural, with the company still tuned to selling high volumes of relatively low value-add products/services, likely keeping margins under pressure," Evercore analyst Rob Cihra said in a note.

LOW BAR

Overall revenue for the fourth quarter was $29.1 billion, beating the average analyst estimate of $27.9 billion, according to Thomson Reuters I/B/E/S.

HP maintained its full-year earnings forecast, which J.P. Morgan Securities analyst Mark Moskowitz said was "more than plenty good after Cisco's big disappointment."

Moskowitz, who raised his price target to $30 from $29, said HP's comments on PCs, printing and the enterprise group could suggest a potential bottoming in the company's model, which could attract value-based and long-term investors.

The company, which has been moving away from a declining PC industry, reported a smaller-than-expected drop in PC sales.

"In short, HP didn't guide down for 2014 and that is quite positive so far versus many in 'old tech,'" Barclays analyst Ben Reitzes said in a research note. He raised his price target to $28 from $26.

Some analysts were concerned a slowdown in China would hurt HP. Cisco had warned of weakness in China, while IBM's sales in China declined in the latest quarter.

But Reitzes said HP seemed to be managing volatility in emerging markets far better than its peers, noting revenue in the Asia Pacific region grew 4 percent in the quarter.

Growth in the region was helped by a contract to supply laptops to the Indian state of Uttar Pradesh, which BMO Capital Markets valued at about $450 million. HP has not disclosed its value.

Still, Evercore's Cihra raised his rating to "equal-weight" from "underweight," citing an improving balance sheet and a moderation in the decline of its PC and printer businesses. Evercore raised its price target to $25 from $20.

Among the nine other firms raising price targets, three increased to $30. Credit Suisse was the biggest mover, with an increase to $30 from $25.

HP shares hit a 12-month high of $27.77 on August 2. The stock hit its 12-month low of $12.22 in November last year.

(Reporting by Neha Alawadhi in Bangalore; Editing by Ted Kerr and Jeffrey Benkoe)

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