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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (320)	5/14/1998 6:25:00 PM
From: porcupine --''''>	Respond to of 1722

The Ax: Analysts' Love Affair with H-P Comes to an Ugly End View From TheStreet.com May 14, 1998 By Eric Moskowitz Staff Reporter Over the past month, Hewlett-Packard (NYSE:HWP - news) almost mystically transformed itself into one of the stock market's technology stars. No longer an underperforming tech stock that had disappointed investors each of the last four quarters, H-P was now a core technology holding, a diversified value play in a volatile (and some would say hyperinflated) space. The analysts' excitement helped push the stock from 60 1/4 on April 8 to 81 5/8 after Wednesday's close. Given that background, the company's announcement that it would once again disappoint investors when it reports fiscal second quarter earnings Friday shocked the hell out of everyone. The most stunning thing about this particular warning from H-P -- which said it would report earnings of around 65 cents a share versus a previous consensus of 77 cents -- is that analysts were jumping all over themselves to cheer for H-P in the past several weeks. Let's go to the calendar. On April 24, respected Prudential Securities analyst Donald Young -- long an H-P critic -- raised his rating on H-P to buy from hold. The upgrade sent the stock up 8, to 74 5/8. (His firm didn't participate in any of H-P's recent offerings.) And then two weeks ago, in a report titled "H-P Takes A PC Victory Lap," Morgan Stanley Dean Witter analyst Thomas Kraemer said that H-P was a safe way to play the PC space because the stock was trading at a discount to its comparable portfolio. Kraemer, who still has an outperform rating on the stock, also maintained his price target of $85. (His firm did participate in one of Hewlett-Packard's recent public offerings.) The most unfortunate analyst was Charles Wolf of CS First Boston, who raised H-P to a buy from a hold on Tuesday -- just a day before the bad news arrived. Calls to Wolf were not returned. "It's an absolutely spectacular example of how no research is being done on Wall Street," says Bill Fleckenstein, a money manager at Fleckenstein Capital who said he was chased out of his short position by the bullish analysts whose cheerleading pushed up H-P. "These analysts are worthless because they are not doing their homework." While Fleckenstein's comments may be a tad harsh, it does seem as if a large number of analysts covering H-P didn't see this one coming. Goldman Sachs' Laura Conigliaro -- who had the stock on her firm's recommended list before downgrading it this morning to market perform -- and her colleagues, J.P. Morgan's Daniel Kunstler and Lehman Brothers' George Elling, were all surprised and forced to lower their ratings on the stock Thursday morning after H-P blindsided them. "I was and am still very bullish in the stock," insists Elling, who lowered his rating from a buy to outperform Thursday morning. "Going from 60 to 80, it probably got ahead of itself, and it also had to address the pricing issues instituted by Compaq (NYSE:CPQ - news) ." The stock closed the day down 11 3/8, or 14%, to 70 1/4 on extremely heavy volume of 23 million shares traded. One question the company needs to answer is, Why didn't H-P tell investors sooner? "They should have done this a long time ago because their quarter has been over for two weeks," said Fleckenstein. (H-P's fiscal second quarter ended April 30.) "Where have they been all this time?" According to the company, it traditionally takes this long to sort out how all its divisions fared. "As soon as we knew, we told the market," says H-P spokeswoman Rhea Feldman. "We pre-announced on the ninth working day after the quarter ended, which is about as long as it usually takes us to figure out what our financial numbers look like." Robertson Stephens analyst Dan Niles -- TSC's ax in the PC space -- says that he was surprised to see Prudential's Young upgrade the stock when he did. "People were saying it was a great upgrade because H-P had a better inventory situation than Compaq and IBM (NYSE:IBM - news) ," says Niles, who does not follow H-P, but has a strong buy on Compaq. "But they still have some channel inventory problems." (His firm didn't participate in either company's public offerings.) Niles points out that analysts and investors have been lumping Hewlett-Packard together with Gateway (NYSE:GTW - news) and Dell (Nasdaq:DELL - news) , direct sellers that are still benefiting from lower PC prices. "That obviously was a mistake." For the record, even its detractors say Hewlett-Packard is a great outfit with top-flight management. "H-P is a fine company that has survived a lot of product transitions," concludes Fleckenstein. "But it has this glow on it because it is H-P, and investors need to remember that it hasn't delivered in a long time." H-P admirers also have to figure out how continuing Asian shortfalls and lower PC margins will affect the company going forward. "A loss in PCs and Far East weakness will not go away quickly," writes Steven Milunovich, an analyst with Merrill Lynch, in a Thursday assessment of Hewlett-Packard's earnings warning. (His firm did participate in one of H-P's recent offerings.) Despite having a relatively clean inventory channel, H-P lost money in PCs as it was forced to meet Compaq's price cuts, notes Milunovich, who raised his intermediate-term rating on the stock to accumulate from neutral at the end of February. "The biggest point of H-P's warning was that it said these problems are going to extend into the next quarter," adds Niles. One bullish point to remember: H-P has a 70% year-over-year PC unit growth rate, the best in the business. As analysts scramble to lower annual earnings estimates for H-P's 1998 fiscal year ending in October, investors may want to take a close look at what the analysts they respect are saying. And then look again. c 1998 TheStreet.com, All Rights Reserved.