HP Will Put More Pressure on Dell -- Andy Neff, Bear Stearns

Includes: DELL, HPQ
by: Andy Neff

Following Hewlett Packard's earnings report last night (view conference call transcript), Bear Stearns analyst Andy Neff sent a note to clients -- key points:

● Highlighting another installment of turnaround progress, HPQ reported its 4th consecutive upside to results/outlook and we see more to come given continued cost efforts (~50% more workforce cuts still on the way), focus on margin expansion (better channel practices) and efforts to accelerate growth (investments in enterprise sales force, commercial printing). We’re raising our ests/target and reiterate Outperform.

● As to collateral impact, while HPQ grew printer units only 3% YoY given consumer weakness and focus on high-usage segments, w/ solid margin expansion above its targeted range, HPQ noted its intentions to accelerate unit growth in C2H06 via more promotions which is negative for LXK. Further, HPQ’s improving PC margins could also continue to pressure DELL as its cost advantage diminishes.

● HPQ reported 2Q06 post-options EPS of $0.54, above our est. of $0.50 (Street at $0.49), driven by GM upside by ~100bps and higher int. income (added $0.02/sh). Revs of $22.55bn (up 5% YoY) met our est. on strength in PCs/Imaging, while Enterprise was light. Printer op. margin of 15.5% was above plan on supplies strength, while PC op. margin rose 125bps YoY on strong notebooks/consumer.

● We’re raising our above-Street ests for FY06 from $2.00 to $2.13 on revs of $91.0bn -- above HPQ’s guidance for $2.04-$2.08 (incl options exp. of $0.13) -- which could still be conservative, and for FY07 from $2.40 to $2.55 on revs of $95.9bn. For 3Q06, we’re raising EPS from $0.44 to $0.48 (vs. $0.36) on revs of $21.75bn vs. guidance of $0.45-$0.48 on revs of $21.75bn.

● We continue to expect P/E expansion as HPQ executes on its turnaround and progresses further on business model improvements. We still feel the confluence of cost savings/operational improvements along w/ better top-line growth could lead to meaningful EPS upside. We’re raising our CY06 price target from $45 to $47 by applying an 18x P/E on our CY07 post-option EPS of $2.63.