Hewlett-Packard (HPQ) got a lift Tuesday from Bernstein Research analyst Toni Sacconaghi, who Tuesday morning boosted his rating on the stock to Outperform from Market Perform. His price target increases to $55, from $51.
Sacconaghi said his upgrade is based on three factors:
- He says the company’s recent acquisition of (EDS) is likely to be “materially accretive” to profits; he believes HP’s analyst day next Monday could trigger “meaningful earnings revisions” and be a catalyst for the stock. Sacconaghi boosted his estimate for the October 2009 fiscal year to $4.23 from $4.03; he expects $4.74 in fiscal 2010. The Street sees $4.04 for ‘09, $4.62 for 2010. And he says his revised estimates model no revenue synergies - and operating margin improvements at EDS lower than those CEO Mark Hurd achieved at both NCR and HP. He thinks the EDS deal will be accretive by 10 cents in fiscal 2009 without assuming any cost or revenue synergies. He sees 2010 operating margins of 8.25%, vs. about 6% expected for fiscal 2008. He also upped his estimate for the fiscal fourth quarter ending October 2008 to $1.06, from $1.04, ahead of the Street at $1.02.
- Sacconaghi writes that he remains cautious on technology spending, but that HP’s large recurring revenue and profit stream and “proven cost-cutting ability” will provide strong relative earnings stability. He also notes that the company is well-diversified across geography, business lines and end markets. Sacconaghi notes that the company has beaten the consensus EPS estimate in each of the 13 quarters that Mark Hurd has been CEO.
- The stock’s valuation, he writes, is “very attractive,” at a nearly 20% discount to the market on FY ‘09 estimates excluding amortization of intangibles, or a 10% discount on GAAP EPS.
HP Tuesday was up 46 cents or 1%, at $46.20.
