Hewlett-Packard (HPQ) Message Board

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Technology Stocks : Hewlett-Packard (HPQ)

HPQ 25.28

-3.8%

Nov 10 3:59 PM EST

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From: Lynn	5/17/2006 7:18:04 AM
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ML increases price objective from $39 to $40 in, "Long the Leverage:" ?? Street underestimates operating leverage We think the Street underestimates the operating leverage in HP's model as CEO Mark Hurd executes a multi-year plan for margin expansion while driving modest growth. The April Q delivered screaming incremental margins of 49%, more than 6X the realized margin of 8% (Figure 2), on 5% revenue growth (8% ex-currency, Figure 1). Revenue was in-line but EPS beat consensus by $0.03 (ex- $0.02 currency) and management guided up (variance analysis in Figures 7-8). Raising estimates & PO; still best long idea in group Our F2006E rises from $1.96 to $2.10 and F2007 goes from $2.23 to $2.30. We are introducing an F2008E of $2.46, which we believe is conservative. We reiterate our Buy rating and nudge up our price objective to $40 from $39 based on a market multiple times 2007E NOPAT/share of $2.06 plus net cash of $6 (Figure 9-10). HPQ remains our favorite long idea; we see long run earnings power north of $2.50. Big restructuring benefit still ahead, and more Management said HP is about 53% of the way through the restructuring in terms of headcount, and we estimate less so in terms of flow through to the bottom line. Moreover, we believe the sources of HP’s margin expansion are more diverse and sustainable than many investors believe. Examples include upsell and attach (worth an estimated $0.30 over 2-3 years) and optimization of gross margin opportunity relative to incremental field selling cost. Pricing a manageable factor Despite Dell price actions we expect HP to price for profit. HP will be modestly more aggressive in servers and printing promos (slight negative for LXK).

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