MOST NOTEWORTHY: Lehman, PNM Resources and Hilb, Rogal and Hobbs were today's noteworthy downgrades:
Wachovia downgraded Lehman (NYSE: LEH) to Market Perform from Outperform citing the larger capital raise, poorly marked assets, and lack of confidence.
Jefferies downgraded PNM Resources (NYSE: PNM) to Hold from Buy citing valuation and lower contribution from the company's First Choice supply subsidiary.
Hewlett-Packard Corp. (NYSE: HPQ) has just dealt Yahoo Inc. (NASDAQ: YHOO) a huge blow at the worst possible time. The world's leading PC maker and largest seller in hot laptop PC category will be replacing Yahoo! with Microsoft Corp. (NASDAQ: MSFT)'s Live Search services starting next January.
It's been my experience that a majority of PC users use the default portal and search engine services that come installed on their PCs. Moving Yahoo! off the world's best-selling PC line won't do anything to help Yahoo! but will do everything to help Microsoft compete more head-on with Google, Inc. (NASDAQ: GOOG). That little web browser toolbar many of us use is billion-dollar real estate, and Yahoo!'s is about to be booted off in favor of Microsoft's.
Microsoft said that the upcoming search partnership with the world's largest seller of PCs would deliver "a very high" volume of search queries. This is just what Microsoft needs to more effectively compete in the internet search arena with Google, but it won't mean serious competition with the search leader either. Still, more search revenue for Microsoft will definitely be seen as a good thing. Meanwhile, Yahoo! will be pondering options on where its future rests, but we'll probably get a better idea before 2009 once the company has its annual shareholders' meeting some time in July.
I used to be a big fan of Dell (NASDAQ: DELL) years back, but I've since been cool on the company due to the challenges it's faced as of late. Yet the company's first-quarter stats, released on Thursday after the closing bell, were interesting. Revenues increased 9% to a whopping $16 billion. Net income increased 12% to $0.38 per share. Briefing.com says that Dell beat on revenues and earnings per share, the latter by a nice $0.04.
Operating income actually dropped, however, 4% on a dollar basis. Still, in the after-hours session, investors sent the shares higher by nearly 10%. One thing I liked about the quarter was that operational cash flow was much healthier this time around. Last year, Dell needed to use $99 million to fund operations; this year, Dell booked $143 million in cash from operations. Awesome improvement. And here's something else shareholders should look positively on: management apparently wants to focus on having operational cash flow exceed net income. A laudable goal in my book.
So, this was a decent quarter. Am I buying? Well... not exactly. Personally, if I want to play personal computers, I'm probably more likely to look at either Hewlett-Packard (NYSE: HPQ) or Apple (NASDAQ: AAPL). I recently wrote about H-P's good quarterly numbers, and as far as Apple goes, that stock is definitely the one to go with in terms of strength and excitement (if you can time the entry points properly, of course). Yeah, I'm just not feeling Dell right now, considering the alternatives; maybe at a later date...
Hewlett-Packard (NYSE: HPQ), an arch competitor of Dell (NASDAQ: DELL), reported Q2 earnings on Tuesday. Looking through the release, I see quite a few things to like about the H-P story.
Revenues increased 11% to $28.3 billion. This increase was aided by international sales and the weak dollar. On an adjusted basis, earnings per share increased 24% to 87 cents. Furthermore, the adjusted operating margin increased 100 basis points to 10%. Cash generated from operations was $4.8 billion during the quarter, which the release categorized as a record statistic. Cash flow is one of my favorite metrics, and I love it when it is doing well. In fact, according to the transcript of the conference call at Seeking Alpha, the six-month operational cash-flow figure had increased 92% over the comparable time frame one year ago, and free cash flow had more than doubled for the same period.
Honestly, it seems like H-P is managing itself very skillfully, leveraging its various brands in the PC sector to great effect. Guidance calls for adjusted earnings of $3.54 and $3.58. This means that, in my opinion, H-P's stock isn't too expensive. It's also trading away from the 52-week high, which is another positive. Of course, the big story surrounding the company at the moment is its announced acquisition of Electronic Data Systems (NYSE: EDS). As Tom Taulli has observed, the EDS buy is logical. Combining H-P's expertise at providing technologies to the PC world with the services portfolio provided by EDS will most likely make HP an even bigger force, and it could give a behemoth like IBM (NYSE: IBM) new challenges.
Hewlett-Packard Corp. (NYSE: HPQ) will purchase about 24 data centers in Europe from BT Group (formerly British Telecom) for $2.9 billion, the Sunday Times in London reported Sunday, with an official announcement likely to come within weeks. However, BT Group will likely sign a 10-year contract to continue using the data centers with HP; BT Group just won't own them any longer.
But this isn't just a deal for HP to own more data centers as it beefs up its service provider portfolio in addition to its manufacturing prowess. BT Group is also going to manage the remainder of HP's voice and data networks worldwide. The London-based telecom company already handles HP's European voice and data networks, so this transaction is like trading a global service contract for a bunch of server farms. Or at least that's what is sounds like.
HP will continue to ramp up its portfolio of service offerings to better compete with IBM Corp. (NYSE: IBM), a company that left the hardware business to focus on service contracts with corporate customers and that has done well at it under former CEO Lou Gerstner and current CEO Sam Palmisano. HP is already a larger company by revenues than IBM, but it doesn't have the service provider clout yet -- it's still first and foremost a manufacturing company.
By some measures, China-based search engine Baidu (NASDAQ: BIDU) has 60% of the search engine market in that country, which now has more internet users than the U.S. Google (NASDAQ: GOOG) is a distant second.
According to Reuters, "Lee Kai-Fu, Google's president for Greater China, said in an interview that the Silicon Valley company intends to add 200 staffers in 2008 to its existing 600 employees and to keep up that level of hiring for the next three to five years."
All of the effort may not help. The Chinese may prefer to use the services of a company that was founded in their own country and where the search technology was originally based on their language. China has watched U.S. tech efforts from Microsoft (NASDAQ: MSFT) to Hewlett-Packard (NASDAQ: HPQ) come into the country and dominate market share. The capital from those efforts makes it way back to the U.S.
Baidu is one of the few Chinese tech companies that has a huge lead on its Western competition. Many people there prefer it that way.
Douglas A. McIntyre is an editor at 247wallst.com.
Hewlett-Packard Co. (NYSE: HPQ) probably had a blockbuster quarter at the end of 2007, according to research firm iSuppli. This is the firm that tears products apart to arrive at a cost of materials and digs into mounds of data to make sales projections on companies before they release official information. ISuppli is estimating that the world's largest PC maker increased shipments in the final quarter of 2007 to 14.6 million units from 11.6 million units, 25% above their 2006 year-end figure,
If that figure is accurate, then it just continues HP's remarkable comeback in the last 24 months under buttoned-down and get-it-done CEO Mark Hurd. Things were rosy for competitor Dell, Inc. (NASDAQ: DELL) as well in 2007's final quarter, with iSuppli stating the the Texas-based PC maker having increased shipments 17% from 2006's final quarter to 11.3 million units. And don't count Apple, Inc. (NASDAQ: AAPL) out as well, as the smaller PC maker increased shipments a whopping 39% in the last quarter of 2007 according to iSuppli. Apple has increased its PC shipments in excellent ways with excellent products -- but globally it's still in sixth place.
The story here is HP -- its immense presence in consumer retail was timed either perfectly or by design to capitalize on the thirst for laptop PCs from that segment -- something that caught Dell completely off-guard in both areas (consumer laptop demand and retail availability). In 2008, HP's mammoth footprint in the computer business is not expected to slow down, something that Dell desperately wishes would happen. So far, there is little to no chance of that happening.
Dell (NASDAQ: DELL) may be back on track. Data from research firm IDC shows that, in the fourth quarter, Dell shipped 17.1 percent more PCs worldwide in the quarter than in the year-earlier period, for a total of 11.3 million units and 14.6 percent of the global PC market, according to Reuters. The company also had strong results in the U.S.
It may be that Dell's program to sell PCs through retail outlets is starting to show results, but that would not account for the global change. The company has attempted to add new models and pair that with aggressive pricing. That is driving growth, which may be coming at the expense of rival Hewlett-Packard (NYSE: HPQ).
If the IDC figures are accurate, Dell's numbers for the last quarter of 2007 should be better than expected.
Douglas A. McIntyre is an editor at 247wallst.com.
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MOST NOTEWORTHY: Lehman, PNM Resources and Hilb, Rogal and Hobbs were today's noteworthy downgrades:
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