Hewlett-Packard - Momentum Continues As There Are Cautious Bright Points For Revenue Growth Emerging

| About: HP Inc. (HPQ)

Summary

Hewlett-Packard's shares buck the trend on Thursday after Goldman closes out its sell recommendation.

Whitman has stabilized the company, and is now looking for renewed topline revenue growth.

A rejuvenation of revenue growth could boost the valuation multiples, pushing shares towards $40.

Shares of Hewlett-Packard (NYSE:HPQ) saw some real strength on Thursday following an "upgrade" from analysts at Goldman Sachs who admitted that their bear case on the stock has been too pessimistic.

Management, under command of Meg Whitman, is doing a great job. Whitman has stabilized the business, aggressively cut costs and is now focusing on growing the business again going forwards.

I remain cautiously optimistic as well.

The Upgrade

Goldman Sachs's Bill Shope "upgraded" his rating on the stock from a sell rating to neutral. Shope raised the price target by seven bucks to $32 per share.

Shope admits that the bear case on the company has been wrong with his negative stance originally being based upon secular challenges. He now admits and emphasized that management has done a much better job than previously anticipated.

Shope originally put shares on the sell list back in April of 2013, after which shares have seen a greater than 50% rally in the time line of just 15 months.

There are still reasons to be very cautious on many of HP's end markets, yet the significant restructuring efforts have adjusted the cost base significantly. This has created a buffer if a further deterioration in these markets might occur. The strong cash flow and debt reduction has alleviated financial concerns of investors as well.

To reflect the greater optimism, Shope has raised the 2014 earnings per share guidance for this year by six cents to $3.70 per share. Further growth in earnings per share is anticipated in 2015 and 2016.

More Positive News

The upgrade followed good news earlier this week. On Tuesday, HP was rumored to acquire IT infrastructure start up company SimpliVity. A potential deal would underlie CEO Whitman's strategy to combine social, mobile, cloud and big data trends. Needless to say, each of these are ¨hot¨ trends in the wider IT and technology sector.

On Wednesday, HP's Enterprise Security Products chief Art Gilliland went live on CNBC discussing Atalla, which is the company's cloud security encryption product. The product is used in 70% of all ATMs encrypting pins, which traverse from the ATM to central servers. These technologies are crucial in the cloud, creating a huge addressable market for the company going forward.

Significant Momentum

Investors have really enjoyed Meg Whitman's aggressiveness in its restructuring efforts. The bottoming out of the declines in the PC market, which was actually the fastest growing business of HP over the past quarter, has been very helpful as well.

Shares have already gained 20% so far this year. At current levels of $34, shares are trading at the highest levels since the first half of 2011. Shares have roughly tripled from their lows set around $12 in the wake of the Autonomy scandal late in 2012 amidst the severe pressure on the core business.

Takeaway For Investors

Back in May, I last checked out the prospects for Hewlett-Packard after the company reported its second quarter results. I concluded that Whitman has stabilized the company while the balance sheet is improving. The company aims to eliminate its current net debt position of $7.5 billion in the short to medium term.

Shares furthermore trade at a little demanding valuation of 11-12 times earnings as Whitman continues to cut jobs in order to boost cash flows and keep profits up. The latest cuts are aimed to save another billion in incremental costs by 2016. The good news is that R&D job cuts are not eliminated, as a matter of fact Whitman's focus has shifted towards more research & development, thereby focusing on future growth again.

With more bright spots emerging on the company's growth ambitions, it is time for these initiatives to hit the topline in 2015 or 2016. A renewed growth track could drive valuation multiples towards a 15 multiple if the company can report mid-single digit topline revenue growth. This could translate into a $40 price target.

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