True Blue Chips: HP and IBM

In my last post on HP, I looked at how its acquisition of technology services firm EDS could place it in a challenger position behind IBM. In this post, we will look at both companies’ recent performances. Yesterday, Hewlett-Packard (HPQ) reported solid Q3 results that beat analyst estimates. Revenue was up 10% to $28 billion versus Street estimates of $27.4 billion. Profit was up 14% to $2 billion or $0.80 per share. Non-GAAP EPS was $0.86 versus Street estimates of $0.83. Suggested reading: HP’s Stunning Turnaround.

Gross margin was 24.2%, down 30 basis points versus last year. Cash flow from operations was $3.4 billion. HP spent $1.6 billion on share repurchases and is left with $3 billion in share repurchase funds. It paid $197 million in dividends.

Driving its strong performance are strong international sales and cost reduction efforts. International sales accounted for 68% of total revenue. Revenue from EMEA grew 16% to $11.2 billion, Asia Pacific grew 14% to $5.2 billion, and the Americas grew 4% to $11.6 billion. Revenue from Brazil, Russia, India and China (BRIC) grew 24% and accounted for 10% of total revenue.

Strong sales in enterprise blade servers and notebooks also contributed to performance. Enterprise Storage and Servers (ESS) revenue grew 5% to $4.7 billion, driven by 66% growth in blades. Storage revenue grew 16%, led by 19% growth in both the midrange EVA and the low-end MSA products. Personal Systems Group (PSG) revenue grew 15% to $10.3 billion, with revenue from notebooks growing 26% and desktops 6%.

The Imaging and Printing Group (IPG) saw printer shipments decline 2% but revenue grew 3% to $7.0 billion led by supplies revenue growth of 11%. In June, the group announced plans to reduce its business units from five to three.

HP Services (HPS) revenue was up 14% to $4.8 billion with Technology growing 13%, Consulting 13% and Integration and Outsourcing 18%. The EDS acquisition is expected to close by the end of the month.

HP Software revenue grew 29% to $781 million, led by 32% growth in the Business Technology Optimization portfolio. HP Financial Services (HPFS) revenue was up 17% to $680 million.

For the fourth quarter, HP expects revenue of $30.2-$30.3 billion and non-GAAP EPS between $1.01 and $1.03. Analysts expect earnings of $1 per share on revenue of $30.2 billion. The stock is currently trading around $44 with a market cap of about $108 billion.

IBM also had a strong second quarter that beat analyst estimates. On July 17, it reported Q2 revenue of $26.8 billion, up 13%. Net income grew 22% to $2.8 billion or $1.98 per share. Analysts had expected earnings of $1.82 per share on revenue of $25.92 billion.

Gross margin was 43.2% versus 41.8% in Q2 07. IBM repurchased shares for approximately $4.7 billion and paid $1.2 billion in dividends. It ended the quarter with a cash balance of $9.8 billion.

Let us now look at revenue by segment. Global Services, which accounted for more than 50% of total revenue, grew 16%. Revenue from Global Technology Services grew 15% to $10.1 billion and Global Business Services grew 18% to $5.1 billion.

Revenue from Systems and Technology segment was up 2% to $5.2 billion, driven by 32% growth in System z mainframe, Software segment grew 17% to $5.6 billion, an increase of 17%, and Global Financing segment grew 6% to $634 million.

By region, revenue from the Americas grew 8% to $10.9 billion, EMEA grew 20% to $9.8 billion, and Asia-Pacific increased 16% to $5.3 billion. Revenue from its new growth markets organization based in Shanghai accounted for 18% of geographic revenues and grew 21%. BRIC countries grew 31% driven by explosive growth in India.

The recession hardly seems to have had an effect on IBM, and for the third time this year it raised EPS estimates to at least $8.75; earlier estimates were $8.2 to $8.3 and most recently, $8.5 last quarter. By 2010, IBM expects to achieve EPS of $10 to $11. It is currently trading around $122 with a market cap of $166 billion.