Hewlett-Packard is our Top Pick based on the following:
The Hewlett-Packard Story
_ Execution and predictability have improved
significantly since Mark Hurd became CEO and hired
several new senior level executives in software, PCs,
and IT. Improved performance is boosting employee
morale.
_ Mr. Hurd and his team remain extremely focused on
costs. We expect another $2.5 billion-plus in cost
reductions during the coming two to three years in IT,
real estate, indirect procurement, services delivery, and
supply chain. A portion of these savings will be
reinvested in sales and channel programs, but a
significant amount will fall to the bottom line.
_ Hewlett-Packard is making very prudent investments to
support future growth. The company is hiring 1,000
new salespeople in commercial printing and enterprise
(hardware, software, and services) and intends to hire
additional salespeople as costs decline. The company’s
go-to-market investments are focused on high-growth
segments such as digital commercial printing, copier
replacement, photo kiosks/minilabs, managed print
services, X86 servers, storage, management software,
outsourcing, and certain portions of the consulting
market.
_ Hewlett-Packard’s product positioning looks to be very
competitive as we enter 2007. The company enjoys
clear technology, scale, brand, and distribution
leadership in inkjet printing (35%–40% of total
operating income). The company is a technology
leader in the blade server and management software
markets and is now considered a tier one provider of IT
outsourcing services.
_ With $7–$8 billion in free cash flow during fiscal
2007, we expect Hewlett-Packard to aggressively
repurchase shares and pursue additional strategic
acquisitions. Share repurchase should reduce share
count because there are significantly fewer options in
the money at current prices and options grants are
being reduced. Acquisitions are likely to be accretive
in year one because they will be funded with cash.
_ Valuation seems inexpensive for a company with 4%–
6% revenue growth and 11%–26% EPS growth
expected during the next two years.
Catalyst
Consistent earnings upside should be the most
significant catalyst. Our current fiscal 2007 non-GAAP
EPS estimate of $2.79 is well above consensus of $2.55
and management guidance of $2.48–$2.53. Our current
fiscal 2008 non-GAAP EPS estimate of $3.11 is well
above consensus of $2.90 and management guidance of
$2.78–$2.98.
The Edge
Our current estimates are well above consensus and
guidance primarily due to assumptions regarding cost
reductions. However, our bottom-up analysis of costreduction
opportunities suggests that even our aboveconsensus
$2.5 billion-plus estimate could prove to be
conservative.
Bottom Line
While Hewlett-Packard shares have risen about 44%
during the past year, we believe they offer more
percentage upside potential than any other hardware
company during the coming year. Our target price of
$48 suggests an expected total return of 17.3%,
including the expected dividend yield. |
