Several firms are commenting on Hewlett-Packard (NYSE:HPQ) after the co posted its CQ2 results last night. I'm going to highlight one very positive note from JP Morgan and one somewhat less positive one from Deutsche:
* JP Morgan notes Hewlett-Packard reported another solid quarter, handily exceeding street expectations. Revenues of $21.89 billion exceeded their estimate and consensus of 21.80 billion. The company's EPS of $0.52 exceeded the consensus expectations of $0.47. Nevertheless, after adjusting for extraordinary items (higher than expected other income, lower share count, and a higher tax rate), the number is actually $0.49. This is in-line with firm's recently raised above-consensus expectations. While they had anticipated the company would exceed consensus expectations, the sources of upside were a surprise. Instead of margin upside from printing as they anticipated, the company exceeded expectations with stronger enterprise, PC and services margins. Firm believes the PC margin upside was most encouraging, as it proves that HP is not suffering from the same ailments as Dell. In their opinion, it also suggests that Dell will have a harder time reversing this shift in the competitive landscape than most currently believe.
Firm was also once again surprised that the company's profit strength came more from the gross margin line than from reduced operating expenses. In fact, the company's gross margin of 24.8% exceeded estimate by 62 basis points. One of the most resilient bearish arguments against the HP story is that the company is simply enjoying the benefits of operating expense reductions, benefits that are presumably finite in nature. It now appears that most of the company's upside versus expectations is coming from significant improvements in execution, and these can be far more sustainable than a simple restructuring program. Most important, the gross margin improvements are coming from segments that have been historically weak for the company.
As the holes in the bearish arguments continue to expand, they believe it will become increasingly apparent to investors that HP is becoming a fundamentally different company. Furthermore, with every quarter of upside they believe it is becoming clear that the earnings power of the new HP is far greater than has been understood by many. At 13x firm's calendar 2007 EPS estimate, HP is trading at a 9% discount to the SandP 500. With steadily improving earnings power and likely multiple expansion from increasing confidence in management, they expect the shares to continue to outperform the peer group average. Firm is reiterating their Overweight rating, and HP remains top pick in the coverage universe.
* Deutsche Bank notes margin performance was impressive and beat their estimates with gross margins of 24.8% and op margins of 7.6% (vs. DB at 24.0% and 7.0%, respectively). In addition, IPG unit growth was strong with units up 15% Y/Y (consumer units +13% Y/Y & commercial units +23% Y/Y), suggesting HP is taking share (most likely from LXK). Surprisingly, PC margins improved Q/Q despite slowing unit and revenue growth. Management also announced a $6B share repurchase program which will support future EPS and be well received by investors.
Also, Some Negatives
HP posted its' lowest revenue growth rate of 5.6% Y/Y (in constant currency) in five quarters (vs. 8.5% Y/Y in 1Q06 and 7.7% Y/Y in 2Q06). In addition, they expect increasing competition to challenge future revenue growth as Dell begins sourcing AMD chips- decreasing HP's cost advantage and product differentiation. Further, PSG revenue growth of 8% Y/Y (+5% desktop and +14% notebook) slowed from 10% in the prior Q (NB units slowed considerably). IPG revenue growth of 5% Y/Y was flat sequentially (despite improving FX impact). It appears HP is moving down market in IPG as HW revenue was weak despite strong printer unit growth (suggesting the high-end is saturated & offers little growth).
Ups tgt to $34 but maintains Hold rating.
Notablecalls: HPQ has a history of extending moves following earnings. While the results were strong I don't think this will be the case today. IPG margins came in weaker than expected (according to my back of the envelope est IPG represents 50% of HPQ's profits) and the overall revenue growth is slowing. Also, the acquisition of MERQ tells me HPQ management is worried about future growth. Color me bearish for 2007.
* JP Morgan notes Hewlett-Packard reported another solid quarter, handily exceeding street expectations. Revenues of $21.89 billion exceeded their estimate and consensus of 21.80 billion. The company's EPS of $0.52 exceeded the consensus expectations of $0.47. Nevertheless, after adjusting for extraordinary items (higher than expected other income, lower share count, and a higher tax rate), the number is actually $0.49. This is in-line with firm's recently raised above-consensus expectations. While they had anticipated the company would exceed consensus expectations, the sources of upside were a surprise. Instead of margin upside from printing as they anticipated, the company exceeded expectations with stronger enterprise, PC and services margins. Firm believes the PC margin upside was most encouraging, as it proves that HP is not suffering from the same ailments as Dell. In their opinion, it also suggests that Dell will have a harder time reversing this shift in the competitive landscape than most currently believe.
Firm was also once again surprised that the company's profit strength came more from the gross margin line than from reduced operating expenses. In fact, the company's gross margin of 24.8% exceeded estimate by 62 basis points. One of the most resilient bearish arguments against the HP story is that the company is simply enjoying the benefits of operating expense reductions, benefits that are presumably finite in nature. It now appears that most of the company's upside versus expectations is coming from significant improvements in execution, and these can be far more sustainable than a simple restructuring program. Most important, the gross margin improvements are coming from segments that have been historically weak for the company.
As the holes in the bearish arguments continue to expand, they believe it will become increasingly apparent to investors that HP is becoming a fundamentally different company. Furthermore, with every quarter of upside they believe it is becoming clear that the earnings power of the new HP is far greater than has been understood by many. At 13x firm's calendar 2007 EPS estimate, HP is trading at a 9% discount to the SandP 500. With steadily improving earnings power and likely multiple expansion from increasing confidence in management, they expect the shares to continue to outperform the peer group average. Firm is reiterating their Overweight rating, and HP remains top pick in the coverage universe.
* Deutsche Bank notes margin performance was impressive and beat their estimates with gross margins of 24.8% and op margins of 7.6% (vs. DB at 24.0% and 7.0%, respectively). In addition, IPG unit growth was strong with units up 15% Y/Y (consumer units +13% Y/Y & commercial units +23% Y/Y), suggesting HP is taking share (most likely from LXK). Surprisingly, PC margins improved Q/Q despite slowing unit and revenue growth. Management also announced a $6B share repurchase program which will support future EPS and be well received by investors.
Also, Some Negatives
HP posted its' lowest revenue growth rate of 5.6% Y/Y (in constant currency) in five quarters (vs. 8.5% Y/Y in 1Q06 and 7.7% Y/Y in 2Q06). In addition, they expect increasing competition to challenge future revenue growth as Dell begins sourcing AMD chips- decreasing HP's cost advantage and product differentiation. Further, PSG revenue growth of 8% Y/Y (+5% desktop and +14% notebook) slowed from 10% in the prior Q (NB units slowed considerably). IPG revenue growth of 5% Y/Y was flat sequentially (despite improving FX impact). It appears HP is moving down market in IPG as HW revenue was weak despite strong printer unit growth (suggesting the high-end is saturated & offers little growth).
Ups tgt to $34 but maintains Hold rating.
Notablecalls: HPQ has a history of extending moves following earnings. While the results were strong I don't think this will be the case today. IPG margins came in weaker than expected (according to my back of the envelope est IPG represents 50% of HPQ's profits) and the overall revenue growth is slowing. Also, the acquisition of MERQ tells me HPQ management is worried about future growth. Color me bearish for 2007.
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