With Sequential Reduction In Negative Elements In End Markets & Corporate Reorganization, Base For Appreciation In Place – Shares Attractive To Own
Financial Snapshot: HPQ ($33.32)
Rev/EPS forecast – Revs $25.6bn (-6% y/y), EPS $0.86 (-2% y/y)
Valuation: P/E 9.2x FY15 EPS (8.6x PEG ratio), HPQ shares are attractive based on the upcoming split of the company into HP Inc and HP Enterprise components.
HPQ – CY15Q1 PC Market Inventory Drawdown Sets Base For Slow Improvement: With the global PC market showing a marked deceleration in CY15Q1 with unit shipments off roughly 6% as channel inventory built up around Microsoft’s phase-out of Windows XP support was cleared, the stage has been set for modest growth over the balance of CY15 with the introduction of Microsoft Windows 10 expected to be a net positive. Note that as CY1Q shipments were the lowest level since CY09Q1, the base for recovery has been set relatively low.
HPQ – FY15Q2 Results Should Contain Fewer Surprises: In FY15Q1 HPQ management shocked investors by announcing that free cash flow would be $3bn below prior guidance due primarily to the impact of the costs of separating the company into HP Inc (printer & PC operations) and HP Enterprise (enterprise hardware, software, services & financing), a transaction expected to become effective 11/1/15. Meanwhile, the impact of lower PC unit shipments and the appreciation of the U.S. Dollar versus HPQ end market local currencies is relatively well understood by investors. To that end, look for relatively fewer surprises in the current quarterly results release, a factor that should offer potential comfort to investors.
HPQ – Shares Attractive On Expected Re-rating for Two Separate Entities: With the split between HP Inc and HP Enterprise, investors will now have the opportunity to chose between two distinctly different companies, each of which currently represents approximately 50% of overall HPQ revenues and profits. HP Inc (printer & PC operations) will be a relatively mature company that will be managed to maximize cash-flow and offer investors a total return vehicle providing dividends and share repurchases. HP Enterprise (enterprise hardware, software, services & financing) will be a higher growth entity focused on profit margin improvement and exposure to high-growth segments such as Big Data, Cloud Computing and the Internet of Things to drive revenue and EPS growth. As such, look for the two companies to attain potentially P/E multiples higher than the present 9.2x FY15 EPS HPQ presently enjoys. On a combined basis, the two new entities should see valuation improve to $45/share, a 38% gain from current levels, thus making HPQ shares attractive to own at present.