Tuesday, November 18, 2008

Hewlett News Turned the Futures

I try to avoid commenting on specific companies, but Hewlett Packard's earnings release seems to have turned the futures around pretty sharply as CNBC and the rest of the financial media are running the "HP GUIDES HIGHER" tagline.

Well, that's only a half of the story.

It is true that their estimated earnings per share are expected to be slightly higher for next year (up from $3.85 to $3.88 to $4.03). Up about 1 - 4% over the old number, not bad in this environment.

But let's look a little deeper.......HP lowered their Sales number by $5 to $8.5 BILLION for next year, but they expect to make more money? Huh?

Here's the devil in the details.....Earnings per share are calculated by taking a company's net income and dividing net income by the number of shares outstanding. In September of this year HP announced a plan to repurchase $8 billion of their own stock. If they completed this repurchase, it would reduce their shares outstanding by over 10%.

Thus, this "INCREASE IN GUIDANCE" is just math slight of hand. Reduce the denominator 10% and your result will go higher even if the numerator goes down 5%.

The markets are all rallying on this news, but I'd expect smart people to see through this fairly quickly.

1 comment:

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