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Hewlett-Packard's Turnaround Starts to Gain Traction, Darden and Abercrombie Guide Lower

February 22, 2013 | About:
U.S. equity markets are trying to rebound after yesterday’s pullback with earnings continuing to come in. Keep an eye out for commentary on the consumer and the effect of higher gas prices. Consumers are already starting to have an effect on consumer spending habits and that might put a wrench on the economy. With that in mind, several consumer discretionary stocks reported earnings and provided some insight into the “state” of the consumer.


The one company making headlines this morning is computer giant Hewlett-Packard (HPQ) after it reported EPS of $0.82 versus analyst estimates of $0.71. The bar was pretty low but bullish comments by CEO Meg Whitman has sent the stock higher in early trading.

“Our turnaround is starting to gain traction,” said CEO Meg Whitman, according to

If you look at the reported numbers, you would definitely not be impressed. Net income declined 16% to $1.2 billion year over year, and revenue fell 6% to $28.4 billion. Its PC and laptop businesses continue to deteriorate as Apple (AAPL) and Samsung continue to make PCs and laptops irrelevant. But CEO Meg Whitman is overhauling HP and streamlining business to turn around the struggling tech giant, but it will take time. She expects the turnaround to really gain meaningful and profitable traction in 2014. With a brighter future ahead, Whitman raised her forecast for the year ending Oct. 31 and now expects operating earnings between $3.40 and$3.60 per share. At a current market price of $18, the company currently trades for 5 times operating earnings.

Gurus have for the most part been bullish. Keep in mind that despite HP’s troubles, the company still is profitable and continues to generate billions of dollars in free cash flow. The one major seller of HP is Baupost Group’s Seth Klarman who recently sold out of his entire stake. Before selling out, HP represented 7% of the equity portion of the Baupost portfolio. Gurus adding to HP or who have recently purchased HP include:

Shares of Darden Restaurants (DRI), which operates the Olive Garden, are mixed after the company warned its third quarter profit would be below analysts estimates. The company is blaming severe winter weather in certain parts of the country, a higher payroll tax and gasoline prices. The company is expecting EPS of $1.00 to $1.02 versus previous analyst estimates of $1.13.

The one Guru who has been purchasing shares of the restaurant chain at or around current levels is John Hussman. Hussman has purchased shares of Darden in the past three quarters and now holds 1.187 million shares. Darden represents roughly 1.4% of the Hussman Funds portfolio.

Shares of retailer Abercrombie & Fitch Co. (ANF) are under pressure after the company reported earnings but guided below analyst estimates. The teen retailers continues to struggle overseas and its Hollister chain didn’t perform as expected during the holiday season. Abercrombie is now projecting earnings of $3.35 to $3.45 for fiscal year 2013. Analysts were expecting EPS of $3.63. At the same time, management increased its quarterly dividend to 20 cents from 17 cents. At current levels, that would be a dividend yield of 1.73%.

Gurus who are bullish on the retailer include Joel Greenblatt and Richard Snow of Snow Capital Management. Neither one’s position is significant as both hold very diversified portfolios.

Disclosure: None

Rating: 2.0/5 (2 votes)


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