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H-P's Q1 profit topped forecast

Hewlett-Packard Co, battling for shareholder approval to acquire PC-maker Compaq Computer Corp for US$23.8 billion, said fiscal first-quarter sales and profit beat forecasts as consumer demand for personal computers and printers picked up.

Earnings in the period ended Thursday were "substantially" more than US$0.16 a share, the average estimate of analysts polled by Thomson Financial/First Call, and sales exceeded expectations, the second-largest computer maker said.

H-P's report comes less than two weeks after Compaq raised its targets for 2002 sales and profit. Chief Executive Carly Fiorina said the improved results show that buying Compaq wouldn't crimp earnings, a claim made by director Walter Hewlett in his challenge to the purchase. Some investors and analysts said the earlier forecasts may have been too low.

"They set a very low standard for themselves," said Tom Rath, a fund manager at Safeco Asset Management Co, referring to H-P. "It was important for them in regards to convincing shareholders to vote for the merger."

Safeco, which manages about US$30 billion in assets, owned 911,300 H-P shares as of December.

The shares of Palo Alto, California-based H-P rose US$0.04 to US$22.04 on Monday and have gained 7.3 percent this year.

Houston-based Compaq, the second-largest PC maker, rose US$0.10 to US$12.20, 12 percent less than the value of H-P's offer. Compaq has risen 25 percent this year.

H-P is motivated to be "as bullish as possible given the tenuous nature of the deal [with Compaq]," Kimberly Alexy, an analyst for Prudential Securities Inc, wrote in a research report.

She has a "hold" rating on both Hewlett-Packard and Compaq and doesn't own either stock.

First-quarter sales rose "moderately" from the fourth quarter ended in October, H-P said.

On Nov. 14, H-P said sales would fall. The average estimate of analysts polled by First Call was for first-quarter sales of US$10.65 billion.

Fourth-quarter revenue was US$10.9 billion.

"We are not distracted by the merger or the challenges of integration, and our customers are not defecting," Fiorina said in a speech broadcast on the Internet from the Goldman, Sachs & Co.

Technology Investment Symposium in La Quinta, California.

In last year's first quarter, H-P had net income of US$328 million, or US$0.17 a share, on sales of US$11.9 billion.

Hewlett-Packard's better-than-forecast results indicate that the company can boost sales without buying Compaq, said David Katz, chief investment officer of Matrix Asset Advisors Inc., which owns shares of both companies.

"It affirms our view that Hewlett-Packard could thrive and prosper on their own," said Katz, who opposes the purchase and helps manage about US$800 million in assets.

Some analysts already expected improving consumer sales to fuel profit and sales in the recent period. On Jan. 18, Dell Computer Corp, the biggest PC maker, said earnings and revenue in the quarter ended Friday would top earlier forecasts because of rising sales of PCs to home buyers.

Even so, Steven Milunovich, an analyst at Merrill Lynch & Co, wrote in a report that he expected H-P to have profit of US$0.17 a share, only US$0.01 above the average forecast from First Call.

"We are surprised by the magnitude of the upside forecast," Milunovich wrote. "In fact, we are somewhat suspicious given management's desire to complete the merger with Compaq."

H-P said it will report final first-quarter results Feb. 13 and hold an analyst meeting in New York on Feb. 27.

No date has been set for the shareholder vote on the Compaq purchase. Hewlett-Packard executives have a good idea of how people will vote, based on meetings with large institutional investors, Fiorina said.

"The level of support for this merger is growing and is more than sufficient to win a shareholder vote," she said in the speech.

Walter Hewlett disputed Fiorina's claim and said her prediction may be illegal.

"Fiorina's statement appears to be a clear violation of the Securities and Exchange Commission rules," Hewlett said.

"We are meeting with investors and what we are hearing is clearly contrary to her assertions."
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