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Bear Stearns analysts Andy Neff, Bill Hand and Ted Chung sent a note to clients suggesting that Hewlett-Packard's (NYSE:HPQ) solid 1Q07 results indicate potential for stronger growth and improvement. Key excerpts follow:

Solid Quarter, Outlok. With another quarter of balanced performance and particular strength in PCs/Imaging, HPQ continued to execute on its turnaround (7th straight upside to results/outlook), and we see potential for improvement into FY08 given cost actions and efforts to accelerate growth. We’re raising our ests/target and would use aftermarket weakness (concerns on gross margin pressure, inventory build and weak cash flow which all should be corrected in 2Q07) as a buying opportunity.

More Opportunities. While HPQ must ultimately make the transition to growth, we see additional opportunities for cost reduction (IT savings, real estate consolidation, services delivery optimization) and potential for stronger growth (sales force hires, increased Global 2K account coverage, acquisitions, industrial printing).

Collateral Impact. HPQ’s increased pricing in high-usage segments accelerated printer unit growth to 18% YoY, while margins expanded on supplies strength, which is negative for LXK (losing share, weaker profitability). HPQ boosted PC mgns to 4.7% (up 80bps YoY) on 19% unit growth, demonstrating superior profit/growth vs. Dell (NASDAQ:DELL).

1Q07 Upside. EPS upside of $0.65 vs. our $0.63 est. (Street at $0.62) was driven by better revs of $25.1bn (above our/Street $24.3bn) given upside in PCs, somewhat offset by lower GM (largely from mix). Inventory rose 24% YoY (vs. 11% rev growth) given shift to ocean freight and increase in PCs (build ahead of Chinese New Year).

Raising ESTS. We’re raising ests for FY07 from $2.60 to $2.70 (above HPQ’s raised guidance for $2.60-$2.65) and for FY08 from $3.05 to $3.15. For 2Q07, we’re raising EPS from $0.64 to $0.65 on revs of $24.6bn vs. guidance of $0.63-$0.64 on revs of $24.5bn.

Raising Target to $59. We’re raising our CY07 target from $58 to $59 using an 18x P/E on our CY08 EPS and see potential for multiple expansion as HPQ executes on cost savings/operational leverage and stronger top-line growth.

Source: Hewlett-Packard: Back in the Game