HP shares jump on turnaround hopes; margins a concern

Wed Nov 27, 2013 2:49pm EST
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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."   Continued...

Meg Whitman, chief executive officer and president of Hewlett-Packard, speaks during the grand opening of the company's Executive Briefing Center in Palo Alto, California January 16, 2013. REUTERS/Stephen Lam