Bullish on HP's Future Following Strong Earnings

5/21 - "We maintain our Buy recommendation on Hewlett-Packard Company (HPQ) on the back of the company’s second-quarter results, as we believe the world's biggest computer maker is well positioned with 70 percent of its revenue and virtually all its growth coming from international markets. The company has maintained a strong competitive position against is closest rivals, IBM (IBM) and Dell (DELL)."

"The stock is currently trading at a P/E multiple of 13.1x our 2008 EPS estimate of $3.56, which is a discount to the industry average and its closest peers, Dell and IBM. Given its continued momentum and geographic diversification, we keep our target price of $55 on the stock."

5/21 - "Buoyed by a strong international presence in fast growing markets, a rich mix of IT product lines, and continually improving cost discipline, HPQ is demonstrating its ability to outperform even in a somewhat challenged macro environment. Consequently, we reiterate our Buy rating and $57 target based on 16x our F08 EPS of $3.56."

"Margin improvements continued with GM of 24.8% (up 30bps seq.) and op. margin of 10.0% (up 10bps seq.) due to continued favorable component environment, disciplined pricing and cost controls...Geographically, 69% of revenue was generated outside the US (similar to F1Q) and continued to provide a positive offset to a domestic market characterized as “somewhat spotty” (although we would not interpret the comments to be as profoundly negative)."

"On a segment basis, PSG (Personal Systems Group) was up 16% y/y with units up 21%; IPG (Imaging & Printing Group) was up 6% y/y helped by a 10% y/y improvement in supplies; ESS (Enterprise Storage & Server Group) improved 9% with strength seen in storage, business critical systems and blades; Services and Software up 12% y/y and 39%, respectively."

"Despite some pockets of softness domestically, HP results essentially beat guidance and the street once more. F3Q guidance called for $27.3-27.4B in revs. and $0.82-0.83 in non-GAAP EPS, with guidance raised for F08 to $114.2-114.4B and $3.54-3.58 (as stated on 5/13). Revising estimates accordingly."

5/21 - "Upside resulted from better margins (+$0.02) and stock buybacks (+$0.02) offset by lower interest income (-$0.01). We reiterate our Buy opinion and are raising our price objective to $57 (from $56)...We are raising our FY08 EPS estimate from $3.54 to $3.59, and FY09 from $4.00 to $4.07."

"Industry Standard Server growth was weaker than expected owing to some missed deals. Business Critical Server trends are improving, especially in North America. Storage results improved after struggling for several quarters. In IPG (Imaging & Printing Group), strong supplies growth accounted for the revenue and margin upside, offsetting lower than expected growth in printer hardware. CEO Mark Hurd, noted that April was slightly better than seasonal and Europe was strong in the quarter...HP Services posted operating margins of 11%, below our 12% estimate and at the low-end of HP’s target range of 11-13%. Excluding any impact from the EDS acquisition, we expect cost initiatives and workforce rebalancing in the Services division to result in a 140bp OPM improvement YoY in F2H08."

"In our view, HP is taking the right steps to reinvest in demand generation, as revenue growth decelerated to 4.5% in F2Q08 (ex currency) versus 8%, 11%, and 12% growth in the last three quarters. In the US (30% of total), revenues were flat YoY. However, incremental margins continue to outpace realized margins suggesting that the margin improvement story is not complete."