Will Hewlett-Packard Company (HPQ) Provide Guidance Above Expectations Next Week?

While HP’s entry into the Chromebook market could help HP maintain its PC market share, Chromebooks are low cost-devices and will not do much for the bottom line. HP’s Chromebook has a starting price of $329.99, well below the average selling price of the company’s Windows PCs. On the other hand, HP does not have much to lose. The PC division produced just $1.7 billion in earnings before taxes last year, less than 14% of the company total. Moreover, the PC business has very low fixed costs, so HP can generally maintain its operating margin even when revenue declines. As a result, even a 15% annual revenue decline in PCs this year would have a relatively modest $0.10 impact on HP’s 2013 fiscal year EPS.

Expectations are low
Expectations for HP’s other businesses are modest enough that downside should be fairly limited. For example, while the services business is expected to generate an operating margin in the high single digits over the long term, for 2013 HP expects operating margin of just 0%-3%, with revenue down 11%-13% due to expiring contracts that will not be renewed. Furthermore, HP expects revenue decreases in the Business Critical Systems line of Itanium-based servers, which will be a drag on profit in HP’s enterprise group.

Tune in next week
To summarize, the upside from better printing margins should have a bigger impact on HP’s FY13 results than downside in PCs. Assuming HP’s other businesses perform up to HP’s very modest internal expectations, the company should be able to report full-year EPS at the top of or above its $3.40-$3.60 guidance range.

Since we are only one quarter into HP’s 2013 fiscal year, the company will probably be conservative in terms of updating its full-year guidance. Nevertheless, there is a good chance that HP will raise the bottom of its guidance range to $3.50 or so. Even that small gesture could have a positive effect on HP shares, insofar as analysts currently expect full year earnings below the guidance range at $3.32. With HP trading at just five times expected 2013 earnings, the company should see significant multiple expansion if it can convince investors that EPS is stabilizing. Improved guidance would be a big help there.

The article Will HP Provide Guidance Above Expectations Next Week? originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Hewlett-Packard. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft.

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