Maybe this will help. From SSB.
--SUMMARY:--Hewlett-Packard Co.--Server & Enterprise Hardware * Yesterday HP was clear: expect strong 15% rev. growth. This implies 16%-17% in CC and suggests our 13% forecast for FY01 is low. * Op. margins, which have avg'd 8% over the past four quarters are expected at 9.5% in 2H00. In Computer Systems (UNIX, Storage, and PCs), op. margins have averaged 4.3% in the past two qtrs and are expected to double in 2H00, driven by a big storage improvement. * HP announced intraday an Amazon.com win which we est. at $500 million over 18 months. This win is indicative of HP's UNIX momentum of the past 3 qtrs and could suggest that our 32% revenue growth est. in 2H00 is low (assumes high-end UNIX Superdome transition). US retail PC's (4% of total revs) were adamantly confirmed to be selling well and taking share in a slowing mkt. * Given abundant justification to inc. our EPS est., we're pounding the table on HWP/WI. --EARNINGS PER SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 10/99 EPS $0.85A $0.73A $0.66A $0.75A $2.97A Previous 10/00 EPS $0.80A $0.87A $0.87E $1.08E $3.60E Current 10/00 EPS $0.80A $0.87A $0.87E $1.08E $3.60E Previous 10/01 EPS $0.96E $1.02E $1.03E $1.19E $4.20E Current 10/01 EPS $0.96E $1.02E $1.03E $1.19E $4.20E Previous 10/02 EPS $N/A $N/A $N/A $N/A $N/A Current 10/02 EPS $N/A $N/A $N/A $N/A $N/A Footnotes: --FUNDAMENTALS-------------------------------------------------------------- Current Rank........:1M Prior:No Change Price (05/31/00)....:$120.19 P/E Ratio 10/00.....:33.4x Target Price..:$130.00 Prior:No Change P/E Ratio 10/01.....:28.6x Proj.5yr EPS Grth...:15.0% Return on Eqty 99...:17.1% Book Value/Shr(00)..:21.17 LT Debt-to-Capital(a)7.4% Dividend(00)........:$.64 Revenue (00)........:48523.00mil Yield...............:0.5% Shares Outstanding..:1021.0mil Convertible.........:Yes Mkt. Capitalization.:122714.0mil Hedge Clause(s).....: Comments............:(a) Data as of the most recently reported quarter. Comments............: --OPINION:------------------------------------------------------------------ UNIX: A Bellwether For HP UNIX is a bellwether for the company and the trends are very positive. Overall, in the last three quarters, growth has increased from 1% to 26%, with further acceleration to 30%-35% expected in the second half of this year. We believe growth has been primarily concentrated at the low and mid-range level, although the high end has performed well given a new product later this year. Strong UNIX sales will help drive a high-end storage recovery, and storage order levels are now on a dollar basis similar to last year's levels when HP was reselling EMC. Superdome, which is the next generation high-end system, was discussed at the meeting. This is the first time HWP has revealed any information on this calendar 4th quarter product. Key points were: Superdome will have 16, 32, or 64 processors per system, TPC benchmark results of approximately 250,000 tpc's are expected (twice the current results from SUNW), and pricing for the system should average $1 million. Beta systems are shipping within the next few weeks, with at least one going to Amazon.com (see below). The company has transitioned its sales focus to a three-tier model, with the top two tiers being direct. The model consists of: 1) A Corporate Accounts business focused at HWP's 70 largest world-wide customers, which is headed by Sam Mancuso, a recent SUNW defect. 2) A Large Enterprise customer group which gets the next 2,000 accounts and is run on a regional geographic basis, and 3) a small and medium businesses group, driven by channel partners, telesales and web selling. The company is not at parity with SUNW's direct sales force. However, it has added 150 new reps from the outside and refocused significant sales resources on its direct sales coverage needs. It will add another 200 or so reps in the next 6 to 7 months as it continues to attempt to grow its direct sales channels. PC's: Growing Strongly Retail PC's in the US saw a slowing in the last few weeks. For HP, retail is 25% of total PC's and the US is 75% of total retail, so based on HP's revenue breakdown, US retail is 4% of total revenue. The international side of retail is generating some of the strongest revenue growth, but we also note that in Germany there was a false start about four years ago. The company has also notched some impressive, large corporate account deals for its consumer PC's such as the recent Ford deal. However, at the margin these are competing with its retail channel strategy. The company's PC growth is impressive versus industry-average levels. For example, WW PC sales are 2.7x the market, and consumer desktops in the US are growing at 2x the industry average. PC server performance has not kept pace recently, and is only growing at 0.5 the industry average levels. The company's WW Mobil market share is 3.4%; its commercial PC market share is 8% and its retail PC share is 11%. These all suggest that plenty of growth is still available to HWP above industry average levels if it can continue to take share. Printing Remains Rock Solid The printing business in the fiscal second quarter grew 9% reported put 13.5% when including currency and 15 days of US inventory adjustments and 4 days of European inventory adjustments. Return on Assets in this business is running at 25%, well above Lexmark's 19%. The company shipped its 100 millionth inkjet printer last year and expects to ship its 200 millionth inkjet printer by the end of 2002. This growth underpins our outlook for inkjet consumables to at least double during this same period from $3.4 billion last year to $7 billion by the end of fiscal 2002. The potential for upside exists to this estimate. The trend to increased photo printing could drive faster revenue growth, since photos take five times as much ink as normal page printing (5.4 billion photos printed last year with growth to 26 billion expected by 2005). Additionally, demand is driven by the internet, which is increasing home printing by 30% and is also increasing coverage per page. In the Laser printing space the company indicated that color laser growth was quite strong. Growth in the most recent quarter was 42% against a very tough comparison, though network monochrome was flattish, as expected. Personal desktop lasers grew well. Market share results represented in the meeting on a WW basis remained as strong as ever. Shares are: Inkjet 43%, Wide format 72%, Mono lasers 58%, Color lasers 54%, Scanners 24%, and network print servers 61%. Revenue Breakdown: Strong WW Growth First-half WW sales show the benefit of HP's strong global infrastructure and powerful brand, which is one of the top 10 most recognized and trusted in the world. Europe was up 14%, Asia Pacific was very strong (Japan up 43%, China up 30%, Korea up 98% an India up 80%), Latin America up 22%, and Canada up 11%. We note that while HP is just one-half IBM's size based in revenues, it sells 30% more in China. The company indicated that recurring revenue increased 18% in 1H00 to $7.5B. The increase was strongest for consumables, up 23% to $4.1B, followed by financing, up 16% to $1B and customer service up 11% to $2.4B. Expense Reduction Initiatives On Track HP's is taking numerous steps to reduce expenses. In cost of goods, the company expects to generate 5-7% of saving of its procurement costs by implementing a procurement exchange with Compaq and other companies. The company has an infrastructure improvement goal to cut $1 billion in expenses by fiscal 2002. It is on and has an interim target of a $525 million reduction by the end of 2001. The improvements are coming from a series of efforts including: Help Desk consolidation, an HR business to employee portal through Yahoo, a change in the stock purchase program, real estate site sales and consolidations, a Smart Buy program using Ariba for a catalog purchase program, and a strategic outsourcing program. Not all of these savings will fall to the bottom line, as some will be ploughed back into R&D and or go to SG&A. Finally, at the tax line each business segment is making a concerted effort to source production from the most tax-advantageous area possible. This appears to be working, since as recently as FY98, the company's tax rate was 27.5%, versus the 24% expected for 2H00. We would not be surprised to see HP's tax rate decline further than current guidance at the 24% level. Margin Improvement Expected A modest improvement in gross margins between first and second half of the year is expected. Our forecast is for gross margins of 29.3%, up from the mid-28% level. Operating margins, which have averaged 8% over the past four quarters, are expected to increase more dramatically than gross margins, and come in at about 9.5% level in 2H00. Amazon.com: Two Good Deals HP announced an Amazon.com deal which we believe is worth approximately $500 million over the next 18 months. We believe this will give HWP roughly 75% of the installed products at Amazon. As a result of the deal, Amazon will become one of HWP's top 5 customers. Both companies acknowledged that the win was based on HWP's strong service delivery on installations made last fall as well as the reliability of HP's UNIX systems. A separate strategic alliance making HWP an anchor tenant in Amazon's Store Front was also announced. Anchor tenant status means HWP will be featured prominently Amazon's 20 million customers. |
