On Wednesday, Hewlett-Packard (HPQ) will host its annual analyst day. HP is expected to give its initial guidance for FY13 earnings and provide more details on the current restructuring process and its future plans. Going into the event, analyst sentiment ranges from cautious to negative. The build-up of negative sentiment over the past year means that HP has a very low bar to clear in order to beat expectations. Just as Research in Motion (RIMM) stock jumped last week on bad (but better than expected) results, I expect HP to move higher after the analyst event.
I expect HP's management to give a conservative 2013 earnings target between $4 and $4.20 on Wednesday. On the Q3 earnings call last month, CFO Cathy Lesjak stated, "In terms of the market conditions, consumer demand remains soft in PCs and printing... From a macro perspective, the environment is even more challenging than we previously thought even 2 months ago. We are cautious about the growth prospects globally for both consumer and commercial spending." HP is unlikely to deviate from this line until it has very clear evidence that business conditions are improving. That said, the macro picture looks somewhat better today than it did in August. Over the past month, numerous central banks have supported further monetary easing. Additionally, Spain is making progress with its deficit reduction and bank recapitalization plans.
Not surprisingly, there are some analysts who believe that HP will not even be able to achieve EPS of $4 for FY13 (for reference, HP's current guidance for FY12 is $4.05-$4.07). Peter Misek of Jefferies and Mark Moskowitz of J.P. Morgan both issued bearish research notes last week, predicting that HP may guide to EPS below $4. However, other analysts have pointed to HP's recent cost-cutting plans and argue that HP can keep EPS at least flat year-over-year. Abhey Lamba of Mizuho recently wrote that earnings would be flat even with a 6% revenue decline in 2013; ISI's Brian Marshall concurs.
There are a couple of reasons why I think the bear case is overblown. First, I think bears will be surprised by the speed at which cost cuts come through. HP is currently in the midst of a reorganization plan that will cut headcount by approximately 29,000 by the end of 2014. By the end of the current fiscal year, as many as 11,500 workers will have left the company; more are expected to leave during the course of 2013. HP originally estimated that the reorganization plan would save $3-$3.5 billion annually after it was completed. I expect HP to realize at least $1.5 billion of savings in FY13, and perhaps as much as $2 billion. Some of this will be reinvested as R&D spending, but I expect management to allow some of this to fall to the bottom line. Based on previous commentary, I would look for HP's leadership to flow enough savings through to the bottom line to keep EPS flat year over year (at a minimum).
Second, I think that conditions will improve in the second half of FY13, particularly in the new PPS (PC/printing) division. Most analysts expect HP (and other PC-makers, such as Dell (DELL)) to receive little benefit from Microsoft's (MSFT) upcoming release of Windows 8. Indeed, it seems unlikely that Windows 8 will spark a surge in PC demand, due to the continuing weak macro environment and cannibalization from tablets. However, HP has revealed some innovative new Windows 8 PC designs, and has really bought into the OS's touch capabilities. If consumers like the concept of a touchscreen PC, we could see HP win back some PC market share in 2013. Furthermore, the end of support for Windows XP in April, 2014 should create replacement cycle demand by the middle of next year. A return to growth in PC sales will have a halo effect on printer sales (though the printing segment also faces secular headwinds from the adoption of tablets).
If HP can also show tangible proof of improvement in its enterprise-oriented business lines (particularly servers, software, and services), this would support a significant (10-20%) gain in HP's share price through the end of 2012. It will be particularly interesting to hear if sales of Autonomy software have improved whatsoever since the recent leadership change. Even without any news on this front, I expect the investment community to be reassured by HP's guidance and discussion of the 2013 outlook. With shares having closed near 52-week lows at $17.06 on Friday, the upside outweighs any downside risks going into this week's analyst meeting. Wall Street's worst fears are already reflected in HP's stock price; any positive news could drive shares back above $20.