Duke, I scratched my head in dismay over the 4%+ price drop of HPQ yesterday. Nuts. Makes no sense to me.
I do not normally do this, but I am going to post part of C's research report written right after HPQ's earnings were released. The earnings were good enough for C to retain their BUY rating on HPQ and price target of 52:
Hewlett-Packard (HPQ)
HPQ: Solid Results, Conservative Outlook; Reiterate
Buy (1H)
February 21, 2007
SUMMARY
? HP remains one of our top 2007 picks, with >21% 12-month upside potential.
? HPQ reported solid 1FQ07 results Tuesday. Revenue of $25.1B (+11% yoy,
+7% cc) was well above our est and consensus of $24.3B due to upside in PCs,
X86 servers, and printer supplies. Non-GAAP EPS of $0.65 was several
pennies above consensus of $0.62 but a penny below our Street-high $0.66.
? Management's 2FQ revenue guidance of $24.5B seems reasonable, but non-
GAAP EPS guidance of $0.63-0.64--down sequentially--seems very
conservative given the normal seasonal mix shift from loss-making printer
hardware to very-profitable printer supplies.
? We remain well above management guidance and consensus for both FY07 and
FY08 non-GAAP EPS.
? Minor adjustments to DCF assumptions and the roll-forward of our P/E
valuation yield a revised 12-month target of $52.
[snip to page 4]
REITERATE BUY (1H); REVISED TARGET OF $52
Hewlett-Packard remains one of our top picks within PC & Enterprise hardware. We
reiterate a Buy / High Risk (1H) rating on HPQ shares with a revised 12-month target of
$52. While the shares are 49% above their 52-week low, we believe they still offer 21%
upside during the coming 12 months. Our thesis is as follows.
• Improved Execution & Predictability – Hewlett-Packard’s execution and
predictability have improved significantly since Mark Hurd assumed the role of
CEO nearly two years ago. We attribute this to more real-time management of
progress against internal plans and new executive hires.
• Cost Opportunities –We expect another $2.5B+ in cost reductions during the next
three years in IT ($1B), real estate ($300-500M), indirect procurement ($200-
300M), services delivery ($200-300M), supply chain ($200-300M), application
porting expenses ($200M), and bonus payments (several hundred million).While a
significant portion of these savings are likely to be reinvested in pricing, sales, and
marketing, a significant portion should fall to the bottom line.
• Prudent Investments in Future Growth – Hewlett-Packard has hired 1,000 new sales
people in commercial printing and enterprise (hardware, software and services), and
intends to hire more. Investments are focused on high growth markets such as
digital commercial printing, copier replacement, photo kiosks/mini-labs, managed
print services, x86 servers, storage, management software, outsourcing, and
consulting.
• Competitive Products – HPQ enjoys clear technology, scale, brand and distribution
leadership in inkjet and laser printing (40-50% of total operating income). The
company is also a technology leader in blade servers and management software and
is now considered a tier-one provider of outsourcing services.
• Strong Free Cash Flow –With $6-7B of free cash flow during FY07, we expect
Hewlett-Packard to aggressively repurchase shares and pursue strategic acquisitions.
• Compelling Valuation – At just 16X our above-consensus F12 non-GAAP EPS,
Hewlett-Packard shares seem inexpensive for 4-8% revenue growth and 12-25%
EPS growth.
• Consistent Earnings Upside – Our FY07 non-GAAP EPS estimate of $2.78 is well
above consensus of $2.57 and guidance of $2.60-2.65. Our FY08 non-GAAP EPS
estimate of $3.10 is well above consensus of $2.92 and guidance of $2.78-2.98. |
