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H-P bundles up for the recession

December 7, 2009 Leave a comment Go to comments

PC maker adopts volume strategy as hardware prices continue to fall.

Hewlett-Packard Co. became a technology star by cutting costs and under-pricing its competitors. Now, the computer maker is pushing the boundaries with a consumer bundle priced so low some analysts wonder if the company makes anything on it.

Since late October, bargain hunters have been able to snap up three H-P computers, a monitor and a wireless router at Best Buy Co. for just $1,199.99. At that price, analysts say it’s hard to see how H-P is profiting very much from each sale, even if Best Buy is absorbing some of the discount.

H-P’s low-priced computers are the latest example of the volume strategy the company has employed as hardware prices continue to drop. As it cuts prices, the Palo Alto, Calif.-based company protects profits by using its enormous sales to win favorable supply and manufacturing contracts to cushion its margins.

“We do use strategic buys, either to generate assurance of supply or better pricing,” H-P Chief Financial Officer Cathie Lesjak said during a conference call to discuss H-P’s fourth-quarter financials.

At the same time, H-P is fine-tuning how quickly it can manufacture and ship products. That includes working more closely with retailers to determine demand, as well as design products tailored to customers’ particular needs. For example, H-P crafted a new desktop computer for the Best Buy makeover bundle, according to the electronics retailer.

“They are like Costco,” said Shaw Wu, a Kaufman Bros. analyst.”They’d rather sell you a gallon of ice cream than a few ounces.” Wu has a buy rating and a $57 price target on H-P shares.

H-P’s assiduous cost containment has made it a standout in the hardware space. Over the past six months, H-P shares have jumped almost 38%, roughly double the performance of competitors International Business Machines Corp. and Dell Inc., according to FactSet. The company’s shares have performed almost as well as perennial favorite Apple Inc., which is up a little over 39% for the period.

Advertisements for the bundle deal, which lasts until Jan. 16, suggest the price tag amounts to a 20% discount on the combined retail prices of the components, though one of items was built especially for the bundle. That’s greater than the 4.7% operating margin for the business unit that includes H-P computer products.

“We don’t comment on the profitability of particular offers, but we are very much on the record with a commitment to running a profitable PC business in U.S. retail,” said Bruce Greenwood, a vice president within H-P’s consumer computer group.

A Best Buy spokesman confirmed the computers were selling quickly, but declined to say whether the retailer was subsidizing the discounts.

Analysts say aggressive price-cutting is nothing new for H-P.

“H-P does a very good job of managing to their operating margin targets,” said UBS analyst Maynard Um. He has a buy rating on H-P shares and sees them hitting $55 in the next 12 months.

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