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

To: PCSS who wrote (2042)	10/28/2002 1:37:14 AM
From: PCSS	Read Replies (3) \| Respond to of 4345

G-S HPQ Research this morning: HPQ: Revs Still Under Pressure But Shd Meet EPS Tgts; FY`03 More Back-End Loaded SUMMARY: Hewlett-Packard will be reporting its Oct. qtr results on Nov. 20, inc'g a 5 pm conf. call (dial-in number 1-877-327-2627 or via webcast). Although matching top-line expect'ns could be more difficult, HP shd meet consensus EPS est's, inc'g profitability improvements in non-printer areas. We are looking for EPS of $0.22 on revs of $17.4B. Given our expect'ns of weak IT spending at least thru mid-cal.'03, we have slightly reduced our FY'03 revs on HP and are now also showing them to be more back-end loaded than previously, with no chg in EPS. Our new FY'03 revs are $72.6B (prev $73B) vs our $71.4B est for FY'02, w/ EPS for FY'03 still at $1.20. Our rating remains MO. ******************************************************** DETAIL** With HP's October quarter about to close, we are posting our preliminary thoughts on its quarterly results. Incorporated in these remarks are also some of the standout conclusions reached during our latest round of field and enduser checks. Hewlett-Packard (HPQ) Report date: November 20, 5:00 PM EST Dial in: 877-327-2627 ALTHOUGH MATCHING TOP-LINE EXPECTATIONS COULD BE MORE DIFFICULT, HP SHOULD MEET CONSENSUS EPS ESTIMATES, INCLUDING PROFITABILITY IMPROVEMENTS IN NON- PRINTER AREAS. Consistent with past quarters, we expect cost cutting and strong profitability from HP's Imaging and Printing unit to drive earnings in the company's fiscal 4Q02. We are looking for EPS of $0.22 on revenues of $17.4B, up 5% qtr/qtr. While revenues in PCs and enterprise systems are likely to be sequentially flat to up only slightly, headcount reductions and operational improvements should trim losses substantially in both of these units. Given our expectations that IT spending will remain sluggish through at least the middle of calendar 2003, it looks like HP's FY03 will start out more slowly and be more back-end loaded than we previously thought. We have adjusted our EPS and revenue estimates as shown below. Goldman Sachs vs. Consensus Estimates ..........Revenues......Oct Qtr........FY02......FY03 Goldman Sachs ...Prior Ests...........$17.4B........$71.4B....$73.0B ...New Ests.............$17.4B........$71.4B....$72.6B First Call..............$17.3B........$71.6B....$72.8B Earnings.........Oct Qtr.....FY02.....FY03....CY02....CY03 Goldman Sachs ...Prior Ests.....$0.22......$0.78....$1.20...$0.86...$1.30 ...New Ests.......$0.22......$0.78....$1.20...$0.82...$1.34 First Call........$0.22......$0.78....$1.16...$0.82...$1.21 Source: Goldman Sachs Research, First Call. PRINTERS CONTINUE TO BE HP'S BIG STORY. Lexmark results provided a glimpse into what we would expect to see from HP in printers, with solid results expected again. As expected, all-in-ones and photo printers remain the biggest drivers. Laser printers, driven by the new low-priced color lasers introduced during the quarter, are also selling well. At the same time, pricing remains relatively stable. In short, we are modeling 12% sequential growth, with 15% growth from supplies, which are now about 54% of total printer revenues. We expect operating margins to be close to though slightly lower than last quarter's record-setting 17.2%. PC PROFITABILITY IS IMPROVING. Last quarter, HP's PC group lost $198M, yielding a negative operating margin of -4.2%. We expect losses to be cut significantly, driven largely by HP's ability to cut procurement costs in the face of its much-enhanced purchasing power. Consumer PC inventories, which ended last quarter at 8.3 weeks, should be down to an improved 6-7 weeks. Meanwhile, commercial PC demand continues to be weak as expected. We are modeling sequential growth of 2.9%, with an operating loss of just over $140M yielding a negative operating margin of -2.9% for PCs. HP'S ENTERPRISE SYSTEMS GROUP (ESG), WHICH STILL CARRIES DOWNSIDE REVENUE RISK, SHOULD ALSO SEE IMPROVED PROFITABILITY. Within the group, industry standard servers (ISS) are doing fairly well versus higher end Unix servers which are weak. Storage is relatively stable but at low levels and in a still very aggressive pricing environment. Software, now centering almost entirely on HP's OpenView, continues to lose money. With most of the $100M in one-time items that were included in last quarter's $422M loss for ESG now gone, we are modeling a loss of $253M on sequential revenue gains of 3.5%, with last quarter's operating margin loss of -11.2% being cut to around -6.5%. OUR GUESS IS THAT WE'LL SEE SOME DOWNWARD REVENUE ADJUSTMENTS TO FY'03 ESTIMATES, INCLUDING MORE BACK-END LOADING OF MODELS. At this point, we're not even sure to what extent HP will provide any overall fiscal 2003 targets, preferring instead to stick to fiscal 1Q (ending January 2003) where there is at least some visibility. Either way, we expect forecasts to be adjusted, mostly on the revenue side, with little change in earnings. HP VALUATION METRICS CONTINUE TO HOLD UP WELL RELATIVE TO THE GROUP. With profitability improving, HP's low-end-of-the-industry range valuation metrics are holding up well. While the combination of macro-driven weakness and ongoing internal changes at HP make for an uncompelling fundamental picture, applying HP's current multiple of 17x to our calendar 2003 $1.34 estimate, yields a low-$20s stock price.