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Analysts back Hewlett-Packard's layoff plans

Hewlett-Packard's headquarters in Palo Alto, Calif. HP says the layoff of 27,000 workers, or 8 per cent of its work force, will be made mainly through early retirement.

Paul Sakuma/Associated Press/Paul Sakuma/Associated Press

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.

"While we certainly don't believe HP has resolved all their issues, we do see the company moving in the right direction," RBC Dominion Securities Inc. 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.

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Rival Dell Inc. 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 per cent of its work force, would be made mainly through early retirement and would generate annual savings of $3-billion (U.S.) 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," Mr. Windsor said.

At least three brokerages raised their price targets on HP 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.

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"We believe many of [HP's]further risks stem from inconsistent operational execution and recent large acquisitions, which, combined with aggressive buybacks, have weakened its balance sheet," Evercore analyst Robert Cihra said.

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 health-care industry.

Analysts, however, prefer HP over Dell saying Dell'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.


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