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Technology Stocks : Hewlett-Packard (HPQ) -- Ignore unavailable to you. Want to Upgrade?

To: PCSS who wrote (733)	6/5/2002 7:12:48 AM
From: PCSS	Read Replies (1) \| Respond to of 4345

from this morning's G-S Action Report: Hewlett-Packard hosted its first post-merger analyst meeting in Boston and provided six quarters of pro-forma financial statements for the newly combined company. Although this should provide better foundation for models that have included large amounts of guesswork until now, the end result being that the FY'03 consensus EPS estimate of around $1.30 should not change much. While there will likely be some tweaking of second half FY'02 numbers, with our numbers moving up slightly and consensus possibly moving down slightly, we view this more as housekeeping than as indicative of any new information. Our key takeaways are as follows: HP'S NEW COST SAVINGS GOALS ARE AHEAD OF SCHEDULE AND PROBABLY HAVE EVEN FURTHER ROOM FOR UPSIDE. HP confirmed our thinking that there was leeway in its cost synergy targets by pushing up its goal of $2.5B in annual cost savings from FY04 to FY03, and setting a new target of $3.0B in savings for FY04 (see table below). Most of the acceleration is attributable to HP more rapidly reducing its workforce by the targeted 15,000 employees, driven by voluntary early retirement programs. Procurement, supply chain and real estate related savings make up the remainder. Our feeling is that these new targets could still have upside potential. It is unlikely that HP would set a cost savings schedule that would be a stretch, particularly in today's unforgiving climate for tech stocks, which leads us to believe that HP could surprise again in both timing and magnitude of further cost synergies. -----------------Old----------New FY2002.......$0.39B.......$0.50B FY2003.......$2.00B.......$2.50B FY2004.......$2.50B.......$3.00B POST THE ANALYST MEETING, WE ONLY NEED TO MAKE MINOR ADJUSTMENTS TO OUR NUMBERS. Surprisingly our forecast for the combined HP/Compaq prior to the meeting remains largely the same with only our estimates for FY02 being slightly raised. As we were the low on the Street for Q3 headed into the analyst meeting, we suspect that consensus estimates may have to come down slightly, particularly the $0.19 consensus EPS estimate for the July quarter, although we would view this more as housekeeping than as indicative of any new information. See the table below for our full set of estimate revisions. -------------------Revenue-------------------------EPS -----------------Old---------New------------Old----------New Jul-02.......$16.66B......$17.08B........$0.15........$0.15 Oct-02......$18.10B......$18.44B........$0.24........$0.25 FY02.........$72.95B......$73.28B........$0.80........$0.82 CY02.........$71.74B......$72.78B........$0.86........$0.92 FY0...........$74.78B......$76.70B........$1.30........$1.30 ALREADY A SOURCE OF STRENGTH, HP'S IMAGING AND PRINTING GROUP IS IMPROVING BOTH IN THE SHORT AND LONG TERM. A confluence of several factors has pushed IPG's long-term operating margins to 11-13% versus the prior 10-12%. In the short term, HP will likely benefit from the continued shortage of all-in-ones and photo printers, which are keeping prices and margins on these products high. In addition, IPG benefits from the increased percentage mix of its highly profitable consumables business - with 10% y/y growth in HP's most recent quarter pushing supplies to 53% of imaging and printing revenues versus 48% in the April-01 quarter. At the same time, HP's re-engineered inkjet family will start to ship in the second half, driving more positive economics at the low end. Longer-term, printer hardware should improve in terms of both revenue growth and profitability given the popularity of higher priced all-in-ones and photo printers and new product categories in commercial printing. CONSUMER PCs FEEL LIKE THEY ARE EVEN SLOWER THAN EXPECTED. HP exited the April quarter with a sharp slowdown in PC demand at the end of the quarter, resulting in inventory buildup of 8 weeks, which HP is trying to currently work down. While some of the slowdown is seasonal, we believe there is the possibility that some is the result of consumer spending interests shifting away from PCs and toward DVD players and large screen TVs. *WITH NO MATERIAL CHANGE TO ESTIMATES, HPQ STOCK CONTINUES TO BE ATTRACTIVE AT CURRENT LEVELS. We continue to believe that HP stock has limited downside from current levels, with HPQ now trading at a P/E of 14, which is at the lower end of its pre-bubble range of 12-22. With IT spending continuing to be a source of concern, we increasingly view HPQ as somewhat defensive in today's dismal IT spending environment given the cost-cutting aspect to its story while the stock also provides attractive upside possibilities.