Monday, October 23, 2006

Calls of Note Part 2

- UBS believes Hewlett-Packard (NYSE:HPQ) is set to outline new operating margin targets in the 9% range at its Dec. 12th analyst meeting in NY. As a result, the firm believes investor psychology will start moving toward a $3.00 EPS figure for calendar 08, which they believe could drive shares through the mid $40's applying a 15-17x multiple (in line with the market/modest premium).

Checks suggest HP momentum continues in PCs, printers & in the enterprise, making operating margin targets of 7.5-8.0% look too conservative for FY07. They believe HP will update those targets on its 4Q06 earnings call, perhaps making firm's FY07 estimate of $2.50 look conservative.

For FY07 their estimate of $2.50 is based on 6% revenue growth to $96.4B & operating margin of 8.6% (factors in the Mercury Interactive acquisition). Given firm's view that margins can top 9% long-term & revenue should continue to grow in the mid-single digits, they are initiating an FY08 estimate of $2.85 based on 5% growth to $100.8B & operating margin of 9.1%.

UBS is adjusting their price target to $50 (was $44) still based on 17-18x forward EPS but now based on new FY08 estimate of $2.85. They believe that HP's faster growth & higher margins warrant a premium to Dell.

Notablecalls: Interesting call from UBS. I'd keep this one on a tight leash (stop) and watch the volume. Lately, I was seen several high profile calls like this one fail miserably in the s-t. If the vol jumps and there is no move in the price, get out fast or even take the other side of the trade.

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