Wall Street Beat: HP, Dell underscore confidence

What’s wrong with this picture? Hewlett-Packard reports great sales, and its share price immediately drops, while beleaguered Dell gets hit with a New York state fraud lawsuit, and shares go up?

Behind the headlines and the share prices, there is method to the madness.

HP reported a great quarter Wednesday. Revenue jumped 13 percent, to $25.5 billion, helped by tremendous sales in industry-standard servers, PCs, and the hot laptop market. HP forecast revenue to increase to $100.5 billion to $100.9 billion for its fiscal year, ending Oct. 31. The prior forecast was $98 billion to $99 billion. If it hits its new revenue target, it would be approximately a 9 percent increase over its 2006 revenue. Most companies HP’s size are expected to grow at 6 percent at the most.

Nevertheless HP shares were trading Thursday afternoon at $44.49, down by 72 cents. But as many analysts noted, HP gave advance notice about its good news last week, so it was not a surprise. (It publicly released some quarterly numbers last week after inadvertently sending them to a third party.) Also, some IT investors may have dumped shares on the good news, hoping to rake in profit.

The question now is whether HP can continue to grow at this pace, now that much of the reorganization cost savings enacted under CEO Mark Hurd have been realized. Most analysts are confident. Credit Suisse hastened to reiterate its “sector outperform” rating this week. Of the 28 analysts tracking HP and polled by Thomson Financial, 19 recommend a “buy” or “strong buy” this month, compared with 17 recommending a “buy” or “strong buy” last month.

Much of HP’s growth is coming at the expense of Dell, which got hit with a double whammy this week: Burgeoning HP sales and the New York state attorney general filing a lawsuit against Dell for fraud in the way it marketed its computers. But company shares Thursday afternoon were trading at $26.20, up by 28 cents. This was after it closed Wednesday at $25.92, up by $1.25.

Part of the reason, as Goldman Sachs stated in a research note, might have been relief that the lawsuit was not a complication of the current U.S. Securities and Exchange Commission investigation into Dell’s accounting. But there is consensus that Dell is serious about a turnaround. Michael Dell took back the CEO reins from Kevin Rollins in January and announced cost-cutting measures. Dell is getting creative: it is offering more Linux-based machines, after polling its customers about the issue, and officials are hinting that direct-sales giant would try going through channels.

In the wake of this week’s news, Goldman Sachs reiterated its “neutral” rating, with analyst Laura Conigliaro writing in a research paper: “Our investment conclusion is still intact — namely, that Dell is a turnaround company in the early stages of major change which should lead to improving trends for earnings and the stock.”

Dell and HP are also enjoying a general sense of confidence. Most research firms are predicting global IT growth around 6.5 percent this year, a modest increase from last year, but IT vendors earnings this past quarter have been strong. Partly as a result, confidence as expressed by the tech-heavy Nasdaq Composite Index is running high. Thursday afternoon the Nasdaq was at 2542.50, compared to 2423.16 close for the first trading day in 2007.