Citigroup Inc. (NYSE:C) anticipates a turnaround at Hewlett-Packard Company (NYSE:HPQ) and hence maintains its Buy rating with a target price of $32.


Jim Suva and the team at Citi Research feel despite experiencing a trough in its earnings during FY 13, Hewlett-Packard can generate earnings growth on the back of restructuring.

Fiscal 2014 will be a pivotal year

Last week, Hewlett-Packard Company (NYSE:HPQ)’s chief executive officer, Merg Whitman exuded confidence, stating the company’s revenue will stabilize next year with pockets of growth besides extending its growth until 2015. During last week’s annual investor briefing, the CEO indicated fiscal 2014 will be a pivotal year, while during fiscal 2015, Hewlett-Packard will see acceleration and in fiscal 2016, the company would be an industry-leading company.

Citi analysts observe contrary to consensus expectations; HP did not lower its earnings estimates during last week’s Securities Analyst Meeting. Instead, Hewlett-Packard Company (NYSE:HPQ) actually guided up on EPS, prompting its 9 percent rally last week.

Citi analysts anticipate Hewlett-Packard’s much criticized balance sheet would substantially recover by end of FY 13 on the back of strong FCF of about $8 billion and discipline on capital allocation. The analysts believe the company has to confront secular challenges particularly in their PCs and printing divisions. However, the analysts point out there is long-term value in those businesses, while the current value doesn’t appreciate such long-term value.

Possible risk factors for Hewlett-Packard

Jim Suva and the team at Citi Research feel some of the risks that Hewlett-Packard Company (NYSE:HPQ) may confront stem from the fact that its printing segment still represents a significant one-third of all its operating profit. Besides, the company would face a major headwind to enterprise hardware growth, in the event of accelerated adoption of public clouds such as AWS. Citi analysts also feel Hewlett-Packard’s continued failure to fix the Services segment would also erode its share and top line.

Valuation rationale

Citi analysts have assigned a Buy rating and pegged Hewlett-Packard Company (NYSE:HPQ)’s target price at $32 based on 8 times F12-month EPS 12 months from now, which is in line with the 5-year average.

Citi analysts point out their Buy recommendation is a contrarian call given the current sell-side ratings distribution skewed with 25 percent Sell ratings and 63 percent Hold ratings as against only 13 percent Buy ratings. This is evidenced from the following graph:

HP's Ratings

Jim Suva and team at Citi feel Hewlett-Packard Company (NYSE:HPQ)’s Services business will recover faster than anticipated and hence the analysts are materially above consensus for 2014 and 2015. The analysts, though, remain cautious on the top line, given challenges in the core PC and printing markets. However, in the event of improving macro environment triggering replacement cycle, the analysts feel Hewlett-Packard could witness upside.