Hewlett-Packard

Raising Estimates and Price Target; Increasing Improvements across Diverse Model Should Help

We recommend building or adding positions in shares of Overweight-rated Hewlett-
Packard. The company's diverse model stands to exhibit the early signs of "all systems go" when F1Q10 results are reported on Wed., Feb. 17. While improving printer hardware installs could weigh on margins, we believe that better than expected revenue and margin trends in PCs, servers/storage, and IT services should provide suitable offsets. HP remains our top pick, alongside Apple, in IT Hardware for 2010.

• Taking numbers higher. For F1Q10 (January), our revised revenue and EPS
estimates are $29.98 billion/$1.06, versus $29.74 billion/$1.04 previously. Street
consensus is $29.86 billion/$1.05. Our revenue assumption implies 4.1% YoY
growth and a sequential decline of 2.6%. Our gross and operating margin
assumptions are 23.5% and 11.4%.

• Early signs of “all systems go” should lift the stock. Inputs from our primary
research contacts suggest that HP is benefiting from increasing improvements in
server and storage demand. When layered in with continued market share
momentum in PCs and higher quality EDS services contracts, we expect HP’s
model to exhibit little gaps in performance. In our view, this dynamic should
boost the earnings outlook and contribute to expansion in HP’s valuation metrics.

• Dell is not the only beneficiary of a corporate PC refresh. HP’s market share
position is nearly 300 bps higher than Dell’s in enterprise PCs. Given HP’s
continued investments in sales coverage and potential EDS "pull through", we
think that HP stands to be the bigger beneficiary of any refresh cycle in corporate
PCs later this year or early 2011. This prospect, alongside the positive impact of a
server refresh, should help HP outperform its PC and server peers, in our view.

• We reiterate our Overweight rating and lift our Dec-10 price target to $59, up
from $58. Currently, HP trades at 10.5x our calendar 2010 EPS estimate, versus
the peer group average of 14.1x. For long-term investors, we continue to believe
that HP offers the right blend of enterprise and consumer exposure to be a
relatively early to middle beneficiary of any IT spending recovery. We expect the
next level of support for our view to come in the upcoming earnings call (Feb. 17)
as consensus numbers should move higher after the event.

FULL REPORT HERE