(HPQ) Hewlett-Packard Wins Shell Deal Pre-Earnings

The world’s largest PC and printer manufacturer Hewlett-Packard Company (HPQ) is in the news for winning a mega deal with oil major Royal Dutch Shell Plc (RDSA). As per this deal, the computing major will work with Shell on seismic sensors which will help in predicting the underground reservoirs of oil and gas companies.

This is one of the largest forays by H-P in the area of wireless computing, and this new system implemented by H-P is expected to improve the quality and accuracy of the seismic information collected by organizations to conduct such studies. We believe this opens up a new area of business for the company.

This apart, the new business is in line with the current expansion plan of its networking business. For the same reason, Hewlett-Packard disclosed its plans of taking over the networking major 3Com Corporation (COMS) in November 2009. The acquisition, valued at $2.7 billion, enables H-P to challenge networking leader Cisco Systems Inc. (CSCO) and grab an additional share of the networking business.

The company was waiting for the final approval from the European Union and received it as expected. H-P has big plans with its sensing network business, and is conceptualizing a process called “Central Nervous System for the Earth,” or CeNSE. As per this process, small, tough sensors will be attached to buildings or bridges, which will keep a tap on the structural weakness and intimate it in advance.

Keeping in mind the expansion plans of H-P’s networking business, we believe the H-P/3Com combination is an ideal fit. When the deal closes, H-P will acquire a new capacity overnight, strengthen its position in China and grow at its competitor’s expense. This apart, the acquisition will give the company an edge over other IT behemoths such as International Business Machines (IBM), Oracle Corporation (ORCL) and Dell Inc. (DELL) apart from Cisco. 3Com will benefit from H-P’s superior brand value and find a broader market for its new products.

The company’s fourth quarter EPS of $1.14 was in line with the Zack Consensus Estimate, although revenue declined compared to the year-ago quarter. The company expects revenue to decline in the first quarter too, but is upbeat about 2010 revenue.

Although we remain positive on the company’s performance going forward given that demand is stabilizing and cyclical businesses (particularly consumer PC) are rebounding, we remain a bit concerned about the long-term growth prospects of its printing unit. Of course the company is aggressively trying to revive its printer business by rolling out new products and adopting innovative business strategies and this should bring some results.

For the quarter to be reported, the Zacks Consensus EPS estimate for H-P is $1.06 a share, just 1 cent below the Most Accurate Estimate, leaving little room for an earnings surprise and some upside potential. This is not unusual for the company as it had an average earnings surprise of only 1.0% in the last four quarters.

Analysts are bullish on the stock, as seven analysts have revised their estimates upward in the last month, with no downward revisions. We expect H-P to deliver modest earnings numbers this week.

Zacks Investment Research

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