HP's Hurd Is About to Be Tested

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We're living through a time frame when the explosion of digital content is significant, so it presents growth opportunities for HP," Hurd said. "It sets the long-term course for the company. We're getting ourselves in the position to take advantage of that opportunity."

There are plenty of true believers, particularly on Wall Street, where analysts are almost universally bullish. On Jan. 10, analyst Bill Shope of JPMorgan Chase said the pullback in HP shares is "an exceptionally attractive entry point for investors." Vincent Benedetti Jr., investment analyst for the New Jersey Division of Investment, which holds about 4.2 million HP shares, says he is considering loading up on more. "I have a high degree of conviction [about HP]," he says.

The question is whether Hurd will live up to expectations. After 14% revenue growth in fiscal 2007, HP has already said it's expecting revenues to rise 6.9% this year, to $111.5 billion. Some analysts are worried that HP won't even hit that target. Kathryn Huberty of Morgan Stanley, who called HP one of her "top picks for 2008" in December, recently lowered her forecast for revenue growth from the company-sanctioned 6.9% to 4.6%. She's concerned about challenges facing the hardware sector.

Consider PCs, which accounted for $36.4 billion of HP's sales last year. Huberty had been expecting Hurd to boost the PC group's sales 9.4% this year, after 25% growth last year. (Other analysts have forecast up to 15% growth.) Trouble is, the worldwide PC market is now expected to grow just 5.4%, according to researcher IDC. HP would have to boost sales at a much greater rate than rivals to meet the predictions.

Hurd and his HP team certainly hope to gain share. But Dell's revival could make big gains difficult. Since Michael Dell returned as CEO, the PC maker has been more aggressive, selling through retailers such as Wal-Mart, for example, and investing in more appealing PC designs. That helped Dell squeak out a small gain in market share in the final quarter of 2007, after five quarters of losing ground. In her more recent research note, Huberty lowered her forecast for HP's PC sales growth to 6.4%.

Morgan Stanley's Huberty still has HP as a top stock pick for this year. She believes the company will be more insulated than most of its peers because it gets more than half of its sales from overseas and very little from the troubled financial-services sector. Still, for Hurd and his team, there are big challenges ahead.

Lee is a correspondent in BusinessWeek's Silicon Valley bureau
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