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Why HP Is the Anti-Dell


One PC maker struggles while another shines.

Hewlett-Packard's (HPQ) fourth-quarter earnings reflect its continued effort to expand through acquisition and deliver end-to-end data services.

The company is scheduled to release earnings Monday after the market close. A conference call will be held at 5 p.m. Eastern Time.

In a pre-announcement, Hewlett-Packard said it expects to earn $0.99 a share compared with a profit of $0.84 for the same period a year ago. Excluding one-time charges, the company said it would have earned $1.14 a share, or $0.01 above the consensus estimate.

Earlier this month, Hewlett-Packard said it had agreed to buy 3Com (COMS), a networking equipment maker, for $2.7 billion. The deal builds on last year's $13.9 billion acquisition of EDS that doubled HP's service revenue and boosted the company's total revenue about 30%. (See also Winners and Losers of the HP-3Com Deal)

"We believe Hewlett-Packard has the potential to gain market share in PCs, servers, printers and IT services," Standard & Poor's says in a research report. "The company has made substantial progress in cost reduction. We think that the major acquisition of EDS, dramatically broadening the services segment, thus enabled Hewlett-Packard to offer better one-stop shopping for global enterprises information technology needs. We believe the pending acquisition of 3Com, if completed as planned, will further enhance the one-stop shopping appeal of Hewlett-Packard."

Looking ahead, Hewlett-Packard said it expects 2010 revenue to total $118 billion to $119 billion, up from its prior estimate of $117 billion to $118 billion. The company expects to earn $3.65 to $3.75 per GAAP diluted a share for the year.

"Out fundamental outlook for the computer hardware sub-industry for the next 12 months is positive," Standard & Poor's says. "We believe the industry downturn in computer hardware has begun to fade in the second half of 2009, and we project PC unit growth of 8% in 2010."

Hewlett-Packard is the leading PC maker with about 19% of the worldwide market.

Rival Dell Computer (DELL) said third-quarter net income fell to $337 million, or $0.17 a share, from $727 million, or $0.37, a year ago. Dell is the world's number three PC maker, trailing Hewlett-Packard and Acer, a Taiwanese company. Shares of Dell fell by 10% in Friday afternoon trading following the news.

The recession is expected to reduce worldwide PC sales about 4% this year after sales rose nearly 10% in 2008. Pricing competition will be stiff and sales of portable notebook computers will erode sales of desktops, but this should improve profit margins, S&P says.

HP's planned acquisition of 3Com is part of a developing slugfest in the industry. Cisco Systems (CSCO), a maker of networking equipment, is expanding its server business to better compete with Hewlett-Packard just as Hewlett-Packard expands into networking.

Others seek similar expansion. In April, Oracle (ORCL), a developer of business software, agreed to acquire Sun Microsystems (JAVA) for $7.4 billion. The deal brought two key assets to Oracle: Java and Solaris. Oracle Fusion Middleware, Oracle's fastest growing business, is built on Sun's Java language and software. The Sun Solaris operating system is the leading platform for the Oracle database, Oracle's largest business.

The European Union extended its deadline for reviewing the deal to January 27, 2010.

International Business Machines (IBM) plans to offer Brocade Communications Systems (BRCD) switching equipment under the IBM brand. Brocade, maker of switches and software to connect servers and storage systems, acquired Foundry Networks, a maker of IP switches, in 2008.

No positions in stocks mentioned.
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