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Bear Stearns analysts Andy Neff, Bill Hand and Ted Chung sent a note to clients following Hewlett-Packard Company's (NYSE:HPQ) after-hours earnings report. The analysts believe that HPQ will continue to outperform in the coming years. Key points from the note:

· Another Upside, More to Come. Continuing to execute on its turnaround, HPQ reported its 5th straight upside to results/outlook, w/ potential for further improvements into FY08 given cost efforts (~35% more workforce cuts to come, IT savings, real estate consolidation), focus on margin expansion (better channel practices) and efforts to accelerate growth (investments in enterprise sales force, targeted acquisitions). We’re raising our estimates (5th time in past yr) and target from $47 to $49.

· Collateral Impact. HPQ’s increased pricing/promotions in high-usage segments drove printer unit growth of 15% YoY while margins compressed 130bps seq, which is negative for LXK (losing share, diminished industry profitability). Further, HPQ boosted PC margins to 4% (up 140bps YoY), close to DELL’s estimated 4.4% in C2Q06, which mutes the risk of a price war.

· Margin Upside. While revs of $21.89bn were slightly ahead of our $21.75bn est., EPS upside of $0.52 (post options) vs. our $0.48 est. (Street at $0.47) was driven by better margins in PCs, enterprise and services which enabled HPQ to compete more aggressively in printers. Higher int. income from real estate gains added ~$0.03.

· Raising Estimates. We’re raising our ests for FY06 from $2.28 to $2.34 -- above HPQ’s guidance for $2.31-$2.33 -- and for FY07 from $2.55 to $2.60. We’re initiating FY08 EPS of $3.00 on revs of $101.3bn. For 4Q06, we’re raising EPS from $0.63 to $0.65 on revs of $24.1bn vs. guidance of $0.61-$0.63 on revs of $24.1bn.

· Next Phase. Despite potential for margin expansion into FY08, HPQ must begin to prepare for growth (Stage 3 of turnaround) which it is doing w/ recent sales force investments. We expect HPQ to lay out a FY08 model at its Dec. analyst day.

· Raising Target. We still feel the confluence of operational improvements and better top-line growth could drive meaningful EPS upside. Our CY06 target of $49 (up from $47) reflects an 18x P/E on our CY07 EPS of $2.70.

Source: Bear Stearns: Hewlett-Packard's Turnaround Story Continues With Another Strong Quarter