Aug 19, 2011
9:18 AM
HP Drops 20%: Six Downgrades; Autonomy Bid ‘Massively’ ExpensivePosted by Tiernan Ray Shares of Hewlett-Packard ( HPQ) have deepened their losses in pre-market trading since last night’s drop following the company’s fiscal Q3 earnings report and a rather disappointing outlook: the stock is now down $5.51, or almost 19%, at $24.
Update: Since opening, the drop has continued, with the stock now down $5.96, over 20%, at $23.55.
Following remarks by CEO Leo Apotheker on last night’s conference call, to the effect that HP is set to embark on a multi-quarter “transformation” that may see a jettisoning of its PC business, the stock has received six downgrades that I can see, from RW Baird, UBS, Needham & Co., Sterne Agee, Deutsche Bank, and CLSA Asia-Pacific Markets.
If the weak fiscal outlook for the year weren’t enough, analysts are not happy with the prospects of HP continuing to try and sell PCs over a year-long period in which it explores strategic options, essentially making the unit a lame-duck in the market. Many argue the company is significantly overpaying for British software vendor Autonomy PLC, which it said yesterday it will acquire for roughly $10 billion.
The fallout today is spreading to numerous vendors, from Cypress Semiconductor ( CY), a maker of touch-panel components that could be hurt by the decision to dump HP’s “TouchPad” tablet, to Intel ( INTC), whose PC market just got more murky, to Dell ( DELL), which was actually initiated by one shop today at a Sell rating as fall-out. (More on that later.)
I’ll try to get to as much commentary as I can this morning, so come back for updates to this post:
Toni Sacconaghi, Sanford Bernstein: Reiterates an Outperform rating on the stock, while cutting his price target to $39 from $60. Sacconaghi estimates a spin-out of the PC business would create a $12 billion company, assuming a multiple of sales of roughly 0.3 times. He advises activist investors to “sharpen your pencils,” calling the forecast, the PC move, and the Autonomy bid a “trifecta of bad news.” “We see the decision to purchase Autonomy as value-destroying; second, we worry about continued poor operational control at HP, particularly in Services; and third, we believe that HP’s decision to publicly announce that it is exploring strategic options for the PC business risks is questionable, given that it could undermine the business going forward. We can’t help thinking that HP may have decided to reveal that it was exploring strategic options principally to mollify investors aghast at the Autonomy deal.”
Katy Huberty, Morgan Stanley: Reiterates an Equal Weight rating on the shares. She applauds the effort to find alternatives for the PC business, “However, several concerns will make it difficult for the stock to work in the near-term. These concerns include the fact that today’s announcement is coming from a position of weakness rather than strength; the ability of management to execute divestitures while integrating a large deal and managing deteriorating fundamentals in ESSN, IPG, Services; and whether Autonomy, which represents 0.7% of HP’s ex-PC revenue, can move the needle enough to change the fundamental story.”
Richard Kugele, Needham & Co.: Cuts his rating to Underperform from Buy, “It is a script that could have just as easily arrived from Hollywood than Palo Alto. Last night (and frankly yesterday afternoon as well), HP may have eroded what remained of Wall Street’s confidence in the company and its strategy with a dramatically lower financial outlook, a decision to cease all webOS devices (including the TouchPad) a mere 48 days after the launch, a decision to seek strategic alternatives for its PSG business (aka the #1 PC business in the world), and the seemingly overly expensive acquisition of Autonomy (cue the irony) for over $10B. This transformation [is] likely to involve material layoffs and the risk of significant share loss and talent drain over the next 12-24 months.”
Shaw Wu, Sterne Agee: Cuts his rating to Neutral from Buy, and suspends his previous $53 price target. HP’s announcement of the exploration of a sale of the PC unit was not done in a clean manner, as was IBM’s ( IBM) announcement, and Wu worries HP is now trying to do too many things at once. “We do not like to change investment ratings post earnings reports as it is after the fact and reactionary, but we see material changes to HPQ’s fundamentals that give us concerns with increased execution risk. To put this into context, at $40 billion in annual revenue, its PC operation is about 30% of total revenue and 16% of profits. While we agree with the strategic rationale, we see three looming issues including uncertainty surrounding its PC operation that will likely put stress on its PC financials that are still material; depressed valuation in the event of a sale or spin-off as everyone knows it’s for sale; and bundling opportunities become limited potentially impacting overall revenue.”
Jayson Noland, Baird: Cut his rating to Neutral from Buy, arguing HP stock is no “safe haven” in a world of troubled economies. He’s concerned about bumps that will come both in the PC decision process, and in the takeover of Autonomy: “We like the investment in infrastructure (as opposed to application) software, but this is expensive at just over $10 billion (8.5x next twelve months’ revenue) and ultimately presents significant integration risk. We also do not fully appreciate the synergy between Autonomy and IPG […] HP is pursuing strategic alternatives for PSG which could include a spin-off, asset sale, or ultimately retaining the division. We expect PSG to lose market share to DELL and others as the decision-making process is expected to take 12-18 months. HP may see some negative impact regarding IPG shelf space and ESS supply chain.”
Kevin Hunt, Auriga Securities: Reiterates a Hold rating on the stock and a $43 price target. The company is “massively overpaying” for Autonomy. Management, “clearly suggested things are likely to get worse at HP before they get better, so we continue to recommend avoiding the HP ‘value trap’.” |
