Following Q1 Results, Analysts Say HP's (HPQ) Multi-Year Turnaround Has Not Yet Begun

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Hewlett-Packard ( HPQ ) shares are sharply lower Thursday afternoon following first-quarter results and a weak outlook. While analysts are mixed on the numbers, they are making one thing clear: a turnaround has not yet begun.

HP reported revenue of $30.04 billion and pro forma EPS of 92 cents, mixed with views calling for revs of $30.7 billion and EPS of 87 cents.

Looking ahead, HP sees second-quarter EPS of 88 cents to 91 cents, versus 95 cents expected on the Street.

Analysts have chimed in following the numbers:

  • Goldman Sachs said EPS beat on lower-than-expected net interest expense. On the light revs, Goldman thinks it was more company-specific issues than anything else. "Although we used to be concerned about year-end IT spending as 2011 came to a close, most IT hardware companies have observed better than expected business conditions in their December and January quarters. We believe the challenges posed by HDD shortages and cyclicality became exacerbated by HP-specific issues-for instance, the underinvestment in the services segment, the strategic review of PSG last fall, the abrupt changes in management, Oracle's withdrawal from supporting Itanium-based servers, and HP's outsized exposure to the consumer inkjet segment."

    The firm does think HP's PSG is finding its footing: "Company management acknowledged that its execution had not been at the level one would expect from a supply chain like HP's. On a more positive note, operating margins of 5.2% were ahead of our 4.5% estimate as the company avoided lower-margin sales amid the rising costs for HDDs."

    Goldman now sees fiscal 2012 "revenues of $123.34 billion and EPS of $4.00, versus $123.71 billion and $4.00 previously." Goldman said the turnaround is "not yet apparent."

    The firm maintains a Neutral rating and $26 price target.

  • Wells Fargo said gross margin of 22.4 percent was negatively impacted by a lower mix of printing supplies, a strong yen, and hardware pricing pressure.

    The firm said, "We are adjusting our estimates slightly as follows: For FY2012, we project revenue of $122.3B and EPS of $4.00, versus our prior estimate of $122.1B and EPS of $4.05. HP is clearly still working out its turnaround strategy and there continues to be the two big overhangs for the business, in the HDD shortages, and the supply channel inventory correction that are not likely to be resolved until late Q3 and into Q4....That said, the company has a couple new product cycles starting that could begin to offset those challenges in H2."

    Wells Fargo is looking to the second half of this year as a "turning point." Maintains Market Perform rating and $28-$30 range.

  • Deutsche Bank called earnings quality poor and said free cash flow of $300 million or so missed the firm's model of $1.9 billion. Further, Deutsche was bearish on HP's turnaround plan, saying, "HP suggested a potential turnaround could take 3-5 years. Revamping the Services business will be the slowest as it is poorly positioned (vs. ACN & IBM etc) and requires investment in sales and services capability to move up the value chain and compete more effectively. PC headwinds include weak consumer demand/Tablet substitution, HDD issues for at least another Q, share losses in EM /European exposure and more formidable competition (DELL, Lenovo and AAPL)."

    The firm adjusted some numbers: 2012 revs and EPS from $125.7 billion and $4.10 to $122.6 billion and $4.00, respectively.

    Deutsche Bank maintains a Sell rating and $20 price target.

  • Brean Murray Carret believes the main theme on HP's call was that a turnaround would be a "multi-year" transition. HP said it hoped revs would flatten by the beginning of fiscal 2013 and then build toward the end of the year.

    Brean said it almost felt like HP was girding for a restructuring of some sort, identifying problem areas as its cost structure, printing business, and its products & supply chain.

    Firm maintains a Hold .

  • Collins Stewart echoes much of what was said, but commented, "Some have jumped on board the HP turn-around ship. We retain our Neutral rating and need to see material progress in order to be more positive. To compare HP & Dell, it was back in '06 when Dell first realized it had issues & six years later, quarters are still erratic. Meanwhile, IBM has done very well for the past few years, but the company worked very hard through the 2001-2006 period to build a turnaround base. Our point is that even though the shares are cheap, this turnaround could be years in the making." The firm sees the turnaround as "multiple years in the making."
HP shares last traded at $27.29, down 5.7 percent from Wednesday's close.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: HPQ

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