Analysts back Hewlett Packard's layoff plans

Thu May 24, 2012 3:18pm BST

1 of 2. HP logo is seen outside Hewlett-Packard Belgian headquarters in Diegem in this January 2010 file photo.

Credit: Reuters/Thierry Roge

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(Reuters) - Analysts said Hewlett Packard Co's plan to cut jobs was a step in the right direction but the PC maker will have to do more to regain investors' confidence.

Shares of the world's No. 1 personal computer maker were up 6 percent at $22.26 in early trading on the New York Stock Exchange on Thursday.

"While we certainly don't believe HP has resolved all their issues, we do see the company moving in the right direction," RBC Capital Markets LLC analyst Amit Daryanani wrote in a note to clients.

The accelerating popularity of mobile computing devices such as Apple Inc's iPad has been eroding PC sales for years and a downturn in the European markets has just added to the pressure.

Rival Dell gave a disappointing revenue forecast Earlier this week that spurred fears that global tech spending is weakening faster than anticipated.

HP said the layoff of 27,000 workers, or 8 percent of its workforce, would be made mainly through early retirement and would generate annual savings of $3 billion to $3.5 billion as it exits fiscal year 2014. The company employs more than 300,000 people globally.

Hewlett Packard, which also posted a second-quarter profit above market estimates, said it expects to use the cost savings from job cuts to drive organic growth.

"The market will likely want to see that the savings are real and tangible in the bottom line before they are diverted to other things," Nomura Equity Research analyst Richard Windsor said in a research report.

"When one has little faith in a management team, there will be little hope that these savings will ever be properly realized as they will never be properly visible," Windsor said.

At least three brokerages raised their price targets on the stock on Thursday.

Analysts said it may be too early to predict a sustainable turn, given the deterioration of demand in Europe and secular pressures in many of HP's businesses into the second half of the year.

"We believe many of HPQ's further risks stem from inconsistent operational execution and recent large acquisitions, which combined with aggressive buy-backs have weakened its balance sheet," said Evercore analyst Rob Cihra.

Rival Dell has been diversifying its revenue base in the face of weakened consumer demand, giving up low-margin sales to consumers and moving into higher-margin areas, such as catering to the technology needs of small and medium businesses in the public sector and the healthcare industry.

Analysts, however, prefer HP over Dell saying the PC maker's revenue and margins growth will take too long to play out, whereas HP's restructuring will likely help the stock over the next few quarters, despite weak revenue.

(Reporting by Supantha Mukherjee in Bangalore; Editing by Joyjeet Das, Saumyadeb Chakrabarty)

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