HP hit with a Moody...
Agency cuts rating
Credit agency Moody's is cutting its rating outlook for Hewlett-Packard from positive to stable. The analysts are worried about HP's longer-term performance and the increasing risk of competition.
Moody's says HP's performance in the enterprise market is: "below expectations, inconsistent and subject to strong competitive and secular trend pressures". The agency complains that HP's cost structure is too high and customers are more interested in lower margin products like x86 servers. HP recently said it wanted to acheive enterprise margins of four per cent in 2005, compared with 1.1 per cent in the financial year 2004. Moody's said this target "will be very difficult to achieve."
HP recently appointed a new CEO - Mark Hurd. Moody's notes that he is likely to need a few months to get up to speed before making strategic changes.
The credit agency was just as dismal with its predictions for HP's services business. The report notes that service margins have fallen for the last five quarters.
But the printer giant was credited with some progress on personal systems. Cost structure has been improved thanks to better supply chain controls and lower warranty costs. HP is also making more direct sales and "upselling higher margin product around the PC". Moody's notes that operating margins reached 2.1 per cent in the most recent quarter - hitting the target of 2 to 4 per cent operating margin set at the time of the Compaq takeover.
HP remains a very low financial risk with $13.6bn of balance sheet cash.®