Cantor Fitzgerald Equity Research analyst Brian J. White raises his 12-month price target to $27.00 from $23.00 for Hewlett-Packard Company (NYSE:HPQ) and rates the company as a Hold as the company announced its 1Q:FY14 results.

Hewlett-Packard

Last night, Hewlett-Packard Company (NYSE:HPQ) reported 1Q:FY14 results with sales upside from better-than-expected PC performance and one-time gains benefiting EPS; however, the company’s 2Q:FY14 EPS outlook is a bit muted. Calendar year 2013 was the third consecutive year of declining sales (down 6%) and EPS (down 8%) for the company. Despite a difficult year on a fundamental basis, the stock increased 96% in CY:13 and has risen another 8% thus far in 2014. Looking forward, we believe investors will increasingly require convincing proof that Hewlett-Packard’s turnaround has long-term, fundamental underpinnings that have the potential to re-position the company for the next wave of IT spending growth; however, we did not hear evidence of this on last night’s call.

Hewlett-Packard delivers upside in 1Q:FY14

Hewlett-Packard Company (NYSE:HPQ) reported 1Q:FY14 sales of $28.2 billion that beat our $26.9 billion projection (FactSet Consensus was at $27.2 billion), while pro forma EPS of $0.90 was above our $0.84 estimate (Consensus was at $0.85); however, this $0.06 EPS upside was driven by one-time items. This was the tenth consecutive quarter that Hewlett-Packard’s sales cycle was in negative territory.

The big surprise of the quarter – Upside in the PC biz

Hewlett-Packard Company (NYSE:HPQ) described the IT spending environment as challenging with some areas stabilizing with improvement in Western Europe but continued challenges in emerging markets. In our view, the big surprise of the quarter was upside to PC sales (i.e., $884 million); however, the margin profile of this business is less than half the corporate average. Sales in the PSG Group were down nearly 1% QoQ versus our down 11% estimate and better than historical seasonality. Also, sales in the Enterprise Services business fell by 3% (vs. our down 5%), while the Enterprise Group dropped by 8% (vs. our down 6%), Software declined by 14% (vs. our down 13%) and Printing decreased by 4% (vs. our down 6%).

A muted 2Q EPS outlook

Hewlett-Packard Company (NYSE:HPQ) slightly adjusted its FY:14 EPS projection to $3.60-$3.75 from $3.55-$3.75 and guided 2Q:FY14 pro forma EPS to a range of $0.85-$0.89. We are increasing our 2Q:FY14 revenue projection to $27.7 billion from $26.7 billion (Consensus is at $26.9 billion) and are maintaining our pro forma EPS estimate at $0.89 (Consensus is also at $0.89). We are raising our FY:14 pro forma EPS estimate to $3.71 from $3.62.

Valuation

We are raising our 12-month price target to $27.00 from $23.00, which is based on just over 7.0x our CY:15 pro forma EPS estimate.