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Market Update

Progress Still Slow on HP's Turnaround Story

Hewlett-Packard is setting and meeting targets under CEO Meg Whitman, but there is clearly a long road ahead for the firm, says Morningstar's Michael Holt.

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 Hewlett-Packard (HPQ) delivered third-quarter results that exceeded its initial forecasts and met the revised targets it provided two weeks ago. The headline numbers are uninspiring, with total revenue of $29.7 billion, down 5% year over year, and profits tanking on a $9.2 billion noncash write-down of goodwill related to the 2008 acquisition of EDS. Nonetheless, HP delivered adjusted earnings per share of $1.00, above the $0.94-$0.97 range it targeted in May. Refusing to succumb to a challenging demand environment in Western Europe, China, and the United States, HP remains on track to deliver $4.05 in adjusted EPS during fiscal 2012, and our $40 fair value estimate is unchanged.

As expected, HP's segments with significant consumer exposure suffered a severe drop in revenue. Sales in the personal systems group fell 10% year over year on weak demand for PCs, led by a 12% drop in consumer revenue. A drop of this magnitude was widely expected after the results that  Dell (DELL) reported one day earlier, but this remains a troubling rate of decline and there is little evidence to suggest that HP is executing well enough to compete in this hyperaggressive pricing environment.

Michael Holt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.