Hewlett-Packard turned in a solid third quarter report
The UBS report highlights that Hewlett-Packard Company (NYSE:HPQ)’s fiscal third quarter top line growth of 1% was largely driven by strong PC sales. HP’s Non-GAAP EPS of $0.89 just exceeded UBS’s $0.88 estimate and was within guidance from $0.86-0.89.
Milunovich was reasonably enthused about the 3Q earnings report. “…the positives exceeded the negatives, in our view, especially updated free cash flow of $9bn having started the year at $6.5bn. Clearly PC growth and the cash conversion cycle can’t continue at current rates, but continued costs savings should result in near 10% EPS growth in F15 on flat revenue.”
There were several positives in the 3Q report, including the firm’s guidance of $9 billion in free cash flow by year end, which Milunovich says is conservative and likely to lead to greater share buybacks. Greater than 12% growth in PC sales—although related to Windows XP expiration—was also certainly notable, and industry standard server sales also increased by 9% with a stable margins. Furthermore, technology services orders continued to move up despite a 3% dip in revenues.
Overall, Milunovich expressed “optimism about F15 EPS if revenue stabilizes based on cost savings and reduced share count.”
Room for PE expansion
The report justified the increased price target from $34 to $37.25 based on positive adjustments to FY15E PE. Of note, UBS’s fiscal year 2015 estimate of $4.00 for Hewlett-Packard Company (NYSE:HPQ) is above consensus. Moreover, Milunovich argues that there is room for P/E expansion to as high as 10x earnings, and still include discount for higher hardware exposure. UBS remains “Neutral due to long-term concerns, but continue to prefer HP to IBM.”
