Hewlett-Packard (NYSE:HPQ) reported F13 results that delighted investors as shares gained after hours. This came as the PC market shows signs of stabilizing. That said, I think from a segment perspective HP still faces a challenging environment. It is with that in mind, that I maintain my view of $33.50 per share being the intrinsic value.
For right now, I am thinking of the outlook for the share price as roughly flat over the next year. In other words, I think there will be some sell offs and some rallies. That is more of a trading environment than an investment environment.
Frankly, I'm having difficulty seeing how HP can outperform the consensus estimates. Also, I think we see interest rates continuing to rise in 2014. I'm bullish on HP, but caution is warranted.
- In tandem with its FQ3 report, Salesforce (NYSE:CRM) has announced it's partnering with HP to offer customers using its apps dedicated cloud computing instances (called Superpods) using HP's converged infrastructure (i.e. integrated server/storage/networking systems). The annual revenue emanating from this could grow into the billions for HP over the next few years, but I'm anticipating it being less than 2% of annual revenue.
- Google Inc. and HP are recalling Chromebook 11 laptop chargers because of fire and burn hazards. That said, the Chromebook appears to be a $100M+ revenue product for HP.
In FQ4, non-GAAP EPS declined 13% to $1.01 with revenue down 3% relative to the year-ago quarter. Fiscal 2013 net revenue of $112.3 billion was down 7% year-over-year with GAAP diluted EPS of $2.62, which means HP is trading at 10.27 times diluted EPS. Net revenue stabilized during FQ4; I'm looking for more signs of stabilization in FQ1 as HP attempts to revive revenues growth.
In fiscal Q1 2014, management is expecting GAAP diluted EPS of $0.60 to $0.64, approximately flat y/y; this leads me to infer that they think net revenue will be flat to slightly down (think -1% to -5%) as management continues to restructure operations. I was thinking earlier in fiscal 2013 that revenues would decline about 5%, which comes with a plus or minus 250 basis points. My view is usually conservative by design.
HP has is a diversified technological solutions provider. When I look at the parts, I'm not sure from where growth will originate. So, there are pockets of strength, such as converged storage, networking, tablets and all-in-one, but there are pockets of weakness, such as PC, business critical systems, and enterprise services. When I think about the whole, it comes together as offsetting parts with a negative bias.
Part of that view emanates from management's focus on enterprise tablet while losing share in consumer compute to consumer tablet and smartphone.
Management is expecting FCF of $6B to $6.5B in FY14 with half returned to shareholders in the form of share repurchases and dividends. Consequently, I think we'll see the dividend rate increased. Also, the P/B will be adversely impacted and the P/E positively impacted by the share repurchases. A no-growth FCF model would place the valuation of HP between $50B and $75B; the current market capitalization is near the lower end of the range.
The sell-side equity analysts are becoming more bullish on HP. Citigroup reiterated its buy rating and raised its price target to $32. Needham's Richard Kugele boosted his EPS estimates. Evercore removed its sell rating and increased its price target to $25. JP Morgan's Mark Moskowitz rates the stock "Overweight" with a price target of $35 per share. Generally, sell-side equity analysts act a confirmation of the current trend.
From a fundamentals perspective, the valuation of HP still faces headwinds. Although there are positive signs in the server and PC markets, I continue to think of the headwinds as secular. Meaning the industry shifts are going to be taking place for the better part of this decade. We are still in the early innings, and it is too early to declare smooth sailing for HP.
After re-examining the valuation, I'm maintaining my intrinsic value estimate of $33.50 per share. HP is performing inline with my expectations, on a consolidated basis. The PC market has surprised to the upside. But I figured that HP's new compute offerings would be competitive in the market.
On a forward looking basis, the valuation could continue to be positively impacted by a favorable equity investment climate. But rising interest rates may start to act as a headwind in calendar 2014.
Right now, I'm not sure how HP will be able to outperform consensus estimates. Also, I'm not anticipating a substantial upside surprise from the macro economy. Thus, I'm maintaining my $33.50 per share intrinsic value estimate.
The question that I'll start attempting to answer during 2014 is, how can HP outperform or underperform consensus estimates in fiscal 2014?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.