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H-P, Dell pressured by sliding PC sales

SAN FRANCISCO (MarketWatch) -- A wobbly personal computer market and an uncertain economy have been weighing on separate efforts of Hewlett-Packard and Dell Inc. to gain a bigger slice of the corporate IT market.

Those trends are expected to be significant factors in both companies' earnings reports next week, as Wall Street's sentiment on the two stocks has soured.

Shares of H-P (HPQ) and Dell (DELL) both hit a 52-week low earlier this month, with each having sustained double-digit declines since the beginning of the year. H-P hit a low of $17.41 on Aug. 2, the same day Dell slipped to its 52-week low of $11.39.

Dell reports results after the market closes on Tuesday, Aug. 21 with analysts expect a profit of 45 cents a share on revenue of $14.7 billion, according to a consensus survey by FactSet. For the year-earlier period, the Round Rock, Tex.-based company posted a profit of 54 cents a share, on revenue of $15.7 billion.

Dell has won cautiously upbeat reviews for an aggressive bid to reinvent itself from a vendor of commodity products, led by PCs, to a stronger competitor in higher-margin equipment and services used in the data centers and other corporate applications.

But it's been a tough strategic switch for Dell.

"PC share losses and deteriorating fundamentals in the traditional PC market continue to weigh on the company's top line and impact progress in Dell's transition to becoming an enterprise solutions and services market leader," Cowen & Co. analyst Matthew Hoffman said in a note to clients this week.

The PC market has been so shaky that Mizuho Securities analyst Abhey Lamba speculated that Dell's revenue may "fall slightly short of expectations," while earnings per share will likely be in-line.

Analysts say Dell could show some improvement in the corporate IT market, especially with servers based on Intel Corp.'s (INTC) new Romley processor.

"We expect Dell to continue losing share in the PC market, while its sales of enterprise solutions will take time to ramp up," Lamba wrote. "Our checks indicate that there was strong momentum behind Romley-based servers among small and medium-sized businesses during the quarter, which should help partially offset the slowdown in PCs."

The second half of the year is expected to be a critical period for the PC industry in general with the roll-out of Windows 8, Microsoft Corp.'s (MSFT) new PC operating system.

Brean Murray analyst Ananda Baruah cited that as a potential factor for the weakness Dell saw in PCs, writing, "On PC's, we didn't see orders pulled into July like we typically would for Dell's quarter close, and activity has been pretty slow so far through August."

He also added the possibility that "we're seeing some potential stall ahead of Windows 8."

But both H-P and Dell are also facing a dilemma in PCs given the strengthening position of Lenovo (LNVGY) , said RBC Capital analyst Amit Daryanani. Noting Lenovo's recent sales and market share gains, Darynani wrote that the Chinese PC giant's results "highlight the challenging position H-P and Dell are in.

"Both H-P and Dell have to decide if they want to focus on share gains or margins as Lenovo is able to subsidize its profits from China to expand its market share globally and start to take share in North America and Europe, which have been H-P and Dell's stronghold," Daryanani added.

H-P investors looking for visibility

H-P, which reports after the closing bell on Wednesday, Aug. 22, is facing more serious questions about its ability to compete in both the consumer and corporate arenas.

Last week, UBS initiated coverage on the stock with a sell rating -- and a reiteration of the view among some that the company should be broken up.

"We question whether H-P is 'better together' and that it might be 'smart to be apart,' specifically spinning off printers and PCs," analyst Steven Milunovich wrote.

H-P last week gave investors something to cheer about when it raised its adjusted earnings outlook to about $1 a share, up from a previous range of 94 cents to 97 cents a share.

But then came some bad news: the company also said it was recording an $8 billion charge related to goodwill write-offs of its services business, underscoring the company's ongoing struggle in a key segment of the corporate IT market and raising questions on the effectiveness of its acquisitions strategy.

Analysts also speculated that cost-cutting was a key factor for H-P's improved earnings forecast, rather than any meaningful gains in revenue.

"Business fundamentals remained weak, in our view," Morgan Stanley's Katy Huberty wrote in a note, adding that "results from competitors and industry data indicate continued headwinds in most of H-P's businesses."

In a new report on Friday, Huberty cited data showing an 18% decline in PC shipments in July compared to the same month last year.

"We believe demand is unlikely to improve until Microsoft's Windows 8 release in late October," she wrote. "Therefore, the PC market continues to be a near-term negative for HP and Dell."

Analysts are expecting H-P to report a profit of 98 cents a share, on revenue of $30.2 billion, according to a consensus survey by FactSet. For the year-earlier period, the Palo Alto, Calif.-based company posted a profit of $1.10 a share, on revenue of $31.2 billion.