Hewlett-Packard Company (HPQ): Positive Outlook With Caveats

Hewlett-Packard Company (HPQ): Positive Outlook With Caveats
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Stifel analysts take a close look at Hewlett-Packard Company (NYSE:HPQ) recommending that investors take a closer look at their latest financial results in order to come up with the right perception of the company.  They have a Hold rating on Hewlett-Packard.

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While we believe investors could question some of the moving parts toHewlett-Packard Company (NYSE:HPQ)’s F1Q14 results (e.g., ~$0.06/sh. one-time EPS benefits; adjusted non-GAAP EPS at $0.84 vs. reported $0.90; also expect focus on decelerating enterprise hardware EBIT% and a 340bps seq. decline in HP’s Ent Services EBIT%), overall we believe the takeaways are positive, especially when considering the current valuation. With net operating cash ~$1.6B (excluding HPFS) we find shares trading at ~4x EV/EBITDA and at ~8.4x EV/FCF (12% yield).

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Estimates; F2014 FCF Upside. We adjust our F2014 and F2015 estimates from $109.8B/$3.64 and $110.2B/$3.70 to $112.2B/$3.71 and $112.6B/$3.80, respectively. HP has guided F2014 non-GAAP EPS at $3.60-$3.75/sh. vs. prior $3.55-$3.75/sh. – inclusive of one-time F1Q14 impacts, as well as an incremental $0.02/sh. negative impact from higher reinvestments. We would remind investors that HP’s non-GAAP EPS includes stock-based comp (negative ~$0.20/annum). HP did state that it sees some upside potential to the targeted $6.0-$6.5B – reflective of a solid $1.993B generated in F1Q14 as the company continues to benefit from strong working capital management. HP’s CCC stood at 15.9 days (vs. 24 day in yr. ago quarter); company now sees sustainable downside to prior ~20-21 day range (focus on days payable and PSG mix going forward).

Segment Highlights. 1.) Enterprise Servers, Storage, & Networking. Revenue totaled $4.87B, roughly in-line with our $4.93B estimate. While we saw solid outperformance in ISS revenue – +6% yr/yr vs. IBM at -16% yr/yr – and we continue to see HP’s storage results as a positive, our model would imply another quarterly decline in enterprise hardware EBIT margin – we estimate slightly below 6% (note: IBM’s disclosed its sold x86 business running at a breakeven EBIT). HP’s converged storage revenue grew 42% yr/yr (vs. +47% yr/yr in F4Q13); combined 3PAR + EVA + XP revenue up 13% yr/yr. vs. our estimate of combined EMC, NetApp, HDS, & IBM storage up 3% yr/yr. HP’s networking revenue grew 4% yr/yr w/ noted improving momentum and switch revenue at +5% yr/yr (vs. Cisco at -2% yr/yr). 2.) PSG. Revenue totaled $8.53B (+4% yr/yr) vs. our $7.7B estimate; EBIT% at 3.3% or flat seq. as HP appears to strategically walking away from lower margin opportunities. 3.)Ent. Services. $5.6B in rev. was below our $5.9B est., though expect more focus on reported 1% EBIT vs. retained 3.5%-4.5% F2014 target w/ ongoing low-margin burn-off. 4.) IPG. Rev. at $5.8B was in-line w/ our estimate; EBIT at 16.8% (-110bps) w/ slightly richer supplies mix.

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