HP (HPQ) Bears Dig In after Surprise Q1 'Beat'

February 22, 2013 8:58 AM EST
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Price: $14.77 --0%

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    13 Buy, 23 Hold, 5 Sell

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Meg Whitman's Hewlett-Packard (NYSE: HPQ) posted a surprise first quarter 2013 top and bottom-line beat after the close Thursday and posted strong cash flow to boot. The results have battered investors smiling and shares higher by 4 percent in the early going Friday. While analysts were shocked by the better-than-expected results they were quick to point out that one quarter does not make a trend and the company faces too many headwinds to be a good buy.

HP reported Q1 EPS of $0.82, $0.11 better than the analyst estimate of $0.71. Revenue for the quarter came in at $28.4 billion versus the consensus estimate of $27.77 billion. Guidance was also stronger than expected. HP sees Q213 EPS of 80 cents to 82 cents, versus the 77 cent consensus. Fiscal 2013 EPS is expected to fall within the range of $3.40 to $3.60, with the Street currently at $3.32.

Noted Analyst Commentary:

Jefferies - Jefferies' analysts noted that one of the main reasons for the beat was that four major services contracts didn't run-off as quick as expected. For one, GM (NYSE: GM) is moving its IT dept back in-house. Management implied that these contracts would roll off toward the beginning of the year, but now management is surprised that they will not roll off until H2. On the guidance, the firm said while they previously thought FY13 guidance was too optimistic, they now think the low end of guidance is achievable due to the delayed run-off in Services contracts and more inelastic consumer hardware printing demand. However, while consensus will likely view the unchanged FY guidance as conservative after a stronger-than-expected H1, they continue to see headwinds: "1) We are unconvinced that new enterprise inkjet printers will drive incremental demand for the category; 2) Enterprise hurt by BCS declines (and related Technology Services BCS-related maintenance; 3) PC headwinds" The firm maintained an Underperform rating and bumped their PT from $10 to $13.50.

Goldman Sachs: Goldman said while it was a solid showing overall, risks remain. They said the strong cash flow (CFO of $2.6 billion was up 115% yoy) "should give investors confidence in HP’s ability to repair its balance sheet." Goldman raised FY2013-FY2015 estimates on account of this quarter's results and updated segment expectations, but remains Neutral as the company faces many secular and operational challenges. Goldman maintained a Neutral rating and raised their PT from $14 to $16.

Deustche Bank: Deustche Bank notes the EPS upside was due to Printing margins of 16.1% versus an expected 12%, and fewer hardware placements relative to Supplies. Like Jefferies, they also note the noted 4 large defections called out in prior Q) did not bleed off as quickly as anticipated which aided revenue and earnings. They note the strong Op Cash Flow of $2.6B which was driven by a $500M benefit from deferred taxes and lower bonus payouts following soft FY12 results. "Unfortunately, none of these items appear sustainable and underlying weakness persists across all
HP’s major businesses." Negatives cited by the firm were that total revs declined 6% Y/Y to $28.4B as all business segments contracted between 2 and 8% Y/Y. In addition, key focus areas including Services (bookings were cited as weak), Software (license sales declined sharply, -16% Y/Y) and Storage (-13% Y/Y) all posted disappointing performance and share loss. "Looking forward, we expect the PC demand environment to remain poor for the remainder of 2013. We also question the sustainability of IPG profits (OMs of 16.1% vs. DB at 12.0%) given the ongoing contraction in HP's printer installed base, the discretionary nature of printing and growing competitive pressures." The firm reiterated a Sell rating but boosted their price target from $10 to $12.

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