Credit Suisse Bullish on Hewlett-Packard Company (HPQ) Following Split


In October 2014, Hewlett-Packard Company (NYSE:HPQ) announced it would split into two separate, publicly traded companies. HP Inc. will focus on PCs and printing, and HP Enterprise will focus on newer technologies, such as cloud and data storage. With a decline in PCs and consumer printing, HP had to restructure in order to recoup its consistently missed earnings estimates, underperforming for the past 10 quarters. Other tech giants such as Dell have made similar moves in the last year, buying EMC and focusing more on the cloud and data storage sectors to stay relevant and competitive in the ever-changing market.

After HP announced low Q3 earnings, down 8% from the previous year, some analysts were apprehensive of the change, while others saw an opportunity for growth. Although the company last posted non-GAAP earnings per share of 87 cents, beating estimates of 85 cents, it missed its $25.5 billion estimated revenue, reporting only $25.3 billion.

In May, Keith Bachman of BMO capital reiterated a Market Perform rating on HPQ and lowered his price target from $42 to $38, stating that cost cutting is not the right direction for the company. He commented that HP should focus more on investing in newer sectors to stay relevant. Similarly, analyst Brian White, with Cantor Fitzgerald at the time, issued a Hold rating on HPQ in August and reduced his price target from $33 to $29, pointing to “challenged trends across the PC and printing markets.”

Despite critics of the decision to split, some believe the move is just what HP needs to stay competitive. HP CFO Catherine Lesjak quelled investor concerns, citing that HP’s market share in the PC sector rose to 18.9% in the third quarter. Likewise, Jim Suva of Citigroup reiterated a Buy rating in May with a $41 price target. The analyst cited that the $450 million dollar estimated restructuring cost was lower than the predicted $500 million to $1 billion, as this “dis-synergy cost was the last major overhang that needed to be resolved before investors became comfortable owning HPQ shares into the break-up in November.”

Now that the company has split, shares decreased 34% year to date and are currently trading at approximately $14, hovering near its 52-week low of $12.13. Kulbinder Garcha of Credit Suisse initiated coverage on HPQ with an Outperform rating and a price target of $19. He believes that although the printing and consumer industry is declining, the key to HP’s success in this split is its investment in new technologies. Furthermore, the analyst sees the split as an opportunity for the company to generate revenue from other aspects of its consumer sector, such as ink. According to Garcha, HP’s strategy to focus more on the commercial sector “could offset declining consumer printers with higher value commercial printers” by investing more in its subsidiaries such as IPG, which makes laser printers.

HPQ consensus

Kulbinder Garcha has an overall success rate recommending stocks of 55% with an average return of +7.8% per rating. According to TipRanks, 13 of the 22 analysts who have weighed in on HPQ in the last 3 months are bullish on the technology company, 1 analyst is bearish, and 8 are staying on the sidelines. The average 12-month price target between these 22 analysts is $32.87, marking a 137% potential upside from current levels.


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