Hewlett-Packard Downgraded by Goldman, BMO, Deutsche after Bombshell


After Meg Whitman, CEO of Hewlett-Packard Company (NYSE:HPQ), dropped her ‘bombshell’ yesterday, investors were not too happy. Shares were down close to double digits earlier this morning, but now have rebounded slightly to -3.4%. Analysts acting like sheeple all have negative things to say aboutHewlett-Packard Company (NYSE:HPQ). Many have downgraded Hewlett-Packard Company (NYSE:HPQ), but in this situation one cannot blame the analysts, since the company did announce shocking news. However, for value investors this could be an opportunity based on a forward PE of approximately 4. Others like Chanos, think the stock is a value trap.

Hewlett-Packard Downgraded by Goldman, BMO, Deutsche after Bombshell

So what happened?

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Hewlett-Packard Company (NYSE:HPQ) hosted its analyst meeting in San Francisco yesterday, issuing a below-consensus FY2013 outlook and laying out a 4-5 year plan for its transformation. For FY2013, the company is looking for EPS of $3.40-$3.60, versus consensus of $4.18. The company’s outlook is closer to the bear case scenario of $3.10 analysts highlighted in analysts’ preview and anticipates year-over-year revenue declines across all businesses except for software. While the services outlook was the key source of downside to our estimates, the company’s outlook for printing and PCs still seems too optimistic; unfortunately, this could represent a source of incremental downside in coming quarters.

 Investment pace won’t close the competitive gap

Hewlett-Packard Company (NYSE:HPQ)’s growth efforts are focused in areas currently dominated by Oracle Corporation (NASDAQ:ORCL), International Business Machines Corp. (NYSE:IBM), EMC Corporation (NYSE:EMC)/VMware, Inc. (NYSE:VMW) and Cisco Systems, Inc. (NASDAQ:CSCO) who have a significant product and capability lead in the key areas of Cloud, Security, Big Data and nexgen services. Many investors believe Hewlett-Packard Company (NYSE:HPQ)’s pace of investment is too low to close the competitive gap in these growth vectors.  HPQ’s R&D investment of ~$3.0-3.5B per year (or ~3% of sales) trails IBM by ~2x and Hewlett-Packard Company (NYSE:HPQ) will remain competitively disadvantaged over the medium term as it rebuilds an overleveraged balance sheet and manages underlying profit declines across most of its businesses.

Deutsche Bank cut their PT to $10, which is based on 6.5x CY13E EV/FCF (lower end of its 3-15x range over past 5 years).

Goldman is downgrading the stock on the news.  They are lowering their 12-month price target to $16 from $20. Their price target continues to be based on a 5X multiple on our revised CY2013 EPS estimate of $3.24 from $4.06 prior.

BMO is lowering their target price to $18 from $23 earlier, as we are moving to the lower end of the P/E range of 5x-6x.

Steerne Angee is lowering their estimates. For FY13, they now project $112.5 billion and $3.60 in EPS (from $120 billion and $4.40 in EPS) vs. consensus at $120.1 billion and $4.18 in EPS

In summary the future of Hewlett-Packard Company (NYSE:HPQ) appears uncertain. On a quantitative basis the stock looks cheap, but on a qualitative basis, it looks messy. Just as it was famously stated, ‘video killed the radio star’, the bears might say ‘iPADs killed the PC’

Disclosure: No position