Bear Stearns: Hewlett-Packard's 'A Compelling Stock', May Outperform in FYO7 (HPQ)

| About: HP Inc. (HPQ)

Bear Stearns analysts Andrew Neff, William Hand and Ted Chung sent a note to clients on Friday outlining their increasingly bullish position on Hewlett-Packard (NYSE:HPQ). Key excerpts (emphasis added):

* HPQ, still in the second stage of a turnaround, is a compelling stock given potential for upside to current company guidance and Street expectations. We ran scenarios to quantify the leverage to our Street-high estimates. This note details an incremental $0.35+ per share from our model, equating to another $6 for the stock --an "aspirational" upside over $50.

* As HPQ approaches its target FY07 operating model (set at its 12/13 analyst meeting) for most of its core business units (comprising ~80% of revs) over 18 months early, we have performed scenario analysis to quantify potential upside from cost savings, revenue growth. Our analysis is not based on new guidance, but our scenarios for FY07 could provide $0.35+ upside to our Street-high est. of $2.40.

* While investors will eventually need to see growth for the third stage of the turnaround, investors can miss price appreciation in turnarounds -- since they don't see the operating leverage from better management, execution, cost focus -- which seem too expensive for value players and don't show enough growth for growth investors, but operating leverage can lead to series of upward EPS revisions.

* We're maintaining our above-Street ests for FY06 of $2.00 in EPS on revs of $90.7bn (up 5% YoY) - above HPQ's guidance for $1.90-$1.95 (incl. options exp. of $0.13) - which could still be conservative, and for FY07 of $2.40 on revs of $95.2bn (up 5% YoY).

* While we are not changing our ests or price target (our target of $45 is based on an 18x P/E multiple on our post-option CY07 EPS of $2.49), we believe that the confluence of continued cost savings/operational improvements along with slightly stronger top-line growth could lead to meaningful upside to earnings for HPQ, which could move the stock above the $50 level if the company executes.

HPQ 1-yr chart: