Hewlett-Packard (HPQ) Drops on Soft Guidance, PC Concerns; Analysts Weigh In

Hewlett-Packard (NYSE: HPQ) is trading lower following a first quarter earnings report out of the company which provided investors with a relatively in-line result, but Q211 guidance. The stock is down 10.3% this afternoon.

Hewlett-Packard reported EPS of $1.36 on revs of $32.3 billion, versus the consensus EPS of $1.29 and revs of $32.958 billion.

Looking ahead, HPQ gave a Q211 outlook with EPS of $1.19 - $1.21 and revs of $31.4 - $31.6 billion, versus the consensus EPS of $1.25 and revs of $32.59 billion.

Commenting on the results:

• Goldman Sachs sees gross margins trending downward "as the tailwind from PC component cost declines eases in coming quarters. This could make it increasingly difficult for HP to fund its opex investment needs with gross margins, making operating margin pressure increasingly likely in coming quarters." GS also thinks that past cost-cutting measures may have stinted longer-term growth prospects.
  
  Goldman maintained their Sell rating and $38 price target.
  
  
• Wells Fargo is "a little surprised that HP didn’t take the opportunity to reset the bar since it will take some time for webOS to offset consumer PC weakness and for services to regain their footing. As a result, HP hasn’t de-risked the full year forecast and in effect created their own stock overhang, in our view."
  
  Wells has a Market Perform with a valuation range of $52 - $54.
  
  
• Brean Murray Carret & Co. is keeping their bullish stance on the stock, assuming: "a little surprised that HP didn’t take the opportunity to reset the bar since it will take some time for webOS to offset consumer PC weakness and for services to regain their footing. As a result, HP hasn’t de-risked the full year forecast and in effect created their own stock overhang, in our view."
  
  Brean is also expecting upside from the stock, "a little surprised that HP didn’t take the opportunity to reset the bar since it will take some time for webOS to offset consumer PC weakness and for services to regain their footing. As a result, HP hasn’t de-risked the full year forecast and in effect created their own stock overhang, in our view." They also cite a robust PC market for continued HP succes.
  
  Brean has a Buy on the shares, with a $60 price target.
  
  
• Deutsche Bank blames former CEO Mark Hurd's poor investment leading toward concerns of competitveness in tablets and PCs. Looking forward, Deutsche comments: "HP revs missed our model by ~$745M or 2% on weakness in consumer PCs and Services due to weak ST Services/ITO results (although LT signings were healthy). We believe iPad cannibalization of consumer PCs is a long term trend and a meaningful contributor to the revenue shortfall. In addition, while webOS tablets and phones appear promising the ecosystem supporting the platform is small, requires significant investment and tablet hardware is not expected until this summer. In addition, we expect growth in Printers and Servers to moderate from current levels."
  
  Continuing: As discussed in prior research, HP’s transition from primarily a cost cutting story (restructuring charges exceed $2B past 2 years) to one of OPEX reinvestment (sales coverage and R&D) raises the operational risk profile of the company."
  
  Deutsche retains their Hold rating on the shares, with a price target of $42.
  
  
• Wedbush also has a more positive view on the stock. They give a nod to the conservative outlook, but also point to improving gross margins and quality of earnings. Wedbush contends: "HP is gaining market share in higher margin businesses, such as networking and servers, and we believe going forward HP will be able to improve its storage and software businesses which carry higher margins compared to other HP segments (such as PCs)."
  
  Wedbush is keeping their Outperform on the shares, with $55 price target.
  
  
• Janney is expecting service challenges as well as consumer/China PC sales headwinds to continue over the next several quarters. Continuing, the firm states: "However, we continue to like the story and the stock long term as we believe the commercial PC, server, storage, networking and printing businesses will continue to perform." Specifically, Janney likes management, and is a fan of their printer and enterprise hardware. Janney states: "Overall, we continue to like the key components of our bull case on HP:
  1. Geographic diversification (~70% of revenues outside the U.S);
     
     
  2. Revenue and profit diversification (no division is more than 50% of HPQ; and
     
     
  3. Leverage with suppliers and the channel (a leader in many categories).

The firm has a Buy rating with $52 price target on the shares.

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