Hewlett-Packard becoming lean, mean fighting machine

The Baltimore Sun

I am delighted with Hewlett-Packard Co. What are the prospects for my shares with the company?

- C.G., via the Internet

Shareholders have been happy with the positive change in its fortunes under chief executive Mark V. Hurd.

It is becoming the industry's lean, mean fighting machine.

After displacing Dell Inc. as the world's No. 1 computer manufacturer last year, technology giant Hewlett-Packard narrowed the gap behind Dell in U.S. market leadership in the first quarter of this year, according to the Gartner Group.

It has an especially strong position in emerging markets that are poised for explosive growth.

The aggressive firm also is making a push into the high-end color copier market with ink-based machines costing $19,000 and up. In addition it recently won a seven-year contract from the National Aeronautics and Space Administration to provide as much as $5.6 billion in servers, printers and other equipment.

Shares of Hewlett-Packard (HPQ) are up 10 percent this year, after gains of 44 percent last year and 36 percent in 2005. Since Hurd joined the company two years ago the share price has more than doubled.

HP sales grew 27 percent in its most recent quarter on cost-cutting and strength in its PC and printer businesses.

Earnings, however, declined 7 percent because of restructuring costs and a tax settlement that boosted the year-earlier quarter. The consensus rating on HP stock is a "buy," according to Thomson Financial, consisting of 10 "strong buys," 10 "buys," seven "holds," one "sell" and one "strong sell."

Hurd is a relentless cost-cutter, reducing the company's workforce, selling excess real estate and cutting its number of data centers. The company's pension plan will be frozen in 2008. Reduced expenses are important not only in combating Dell but also in taking on lower-cost overseas competitors such as Acer and Lenovo.

It should be noted that even though the company's services business is growing, it does not yet have the size of competitors such as International Business Machines Corp., Electronic Data Systems Corp. and Accenture Ltd.

HP earnings are expected to increase 25 percent in its fiscal year ending in October and 12 percent next fiscal year. The five-year annualized growth rate is projected at 14 percent, compared with the 15 percent forecast for the diversified computer systems industry.

In a last vestige of the company's boardroom spying scandal, the Securities and Exchange Commission recently found that HP violated mandatory disclosure rules in how it announced Thomas J. Perkins' May 2006 board resignation. But the settlement only requires that the company not violate SEC reporting requirements in the future.

I'd like to know more about Janus Growth & Income Fund, which was recommended to me.

- P.H., via the Internet

Minyoung Sohn, the fund's portfolio manager since early 2004, seeks both capital appreciation and income.

The $6.8 billion Janus Growth & Income Fund (JAGIX), which has had 21 percent growth in total return over the past 12 months, ranks in the top half of large-cap growth funds. Its three-year annualized return of 14 percent puts it in the top 12 percent of that category.

Industrial materials, energy, financial services and health care are its largest sector weightings. Top holdings are General Electric Co., CVS Caremark Corp., Valero Energy Corp., EMC Corp., Procter & Gamble Co., Hess Corp., EnCana Corp., Roche Holding Ltd., Citigroup Inc. and Exxon Mobil Corp.

Sohn is attempting to increase the fund's income by putting up to 15 percent of its assets into structured notes, which are lending agreements with large investment banks and other parties that generate current income by selling off part of a stock's upside potential.

"We recommend this fund for investors looking for a core growth holding," said Andrew Gogerty, analyst with Morningstar Inc. in Chicago.

Sohn, an analyst at Janus since 1998, also runs Janus Fundamental Equity Fund. He prefers companies with strong balance sheets that can produce higher-than-expected earnings or cash-flow growth. Turnover is about half that of most large-cap growth funds and the fund is more diverse than some other Janus growth funds.

"Making the transition from analyst to manager requires a similar but different set of skills, so the risk is that there are going to be some bumps along the way," said Gogerty, acknowledging that Sohn made some past mistakes in positioning the portfolio in some technology and health care stocks. This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 0.88 percent.

What is the best way to buy a foreign stock? Does it matter if it trades on a foreign exchange rather than a U.S. exchange?

- R.C., via the Internet

The easiest way is through an American depositary receipt, or ADR, for foreign companies that offer them. This is a stock that trades on a U.S. stock exchange but represents a specified number of shares in a foreign company that is seeking to attract U.S. investors.

For companies not available as ADRs, the investor must buy the actual stock on a foreign exchange, in which case a U.S. brokerage handling the transaction is likely to charge more because it is somewhat more complicated than buying here.

"ADRs are filed with the Securities and Exchange Commission, they trade and settle under its rules, and they settle in U.S. dollars," said Julio J. Lugo, vice president of global capital markets for the Bank of New York. "Those that trade on the NYSE, Amex and Nasdaq must file a 20-F, an equivalent to the 10-K filed by U.S. firms that follows generally accepted accounting principles."

Of about 2,000 available ADRs, about 450 trade on the New York Stock Exchange, American Stock Exchange and Nasdaq Stock Market, about 1,100 trade over the counter and the rest trade in the private market for qualified institutional buyers.


Andrew Leckey writes for Tribune Media Services.

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