Sterne Agee’s Shaw Wu Likes the Look of the Newly Streamlined HP
Before yesterday’s big management shakeup was announced at Hewlett-Packard, the company’s shares were trading at their lowest levels in about two years. When the market opens today shareholders will indicate whether they like what they see.
It was for Hewlett-Packard another of those sudden, jarring shifts where the course of the company diverges from being one thing, to something new entirely. Léo Apotheker’s remaking of the company, which began with January’s purge of four board members, is now well underway. Ann Livermore’s departure from head of the enterprise business to a seat on the board of directors is making way for a new power trio of executives who will report directly to Apotheker: Dave Donatelli, executive vice president, Enterprise Servers, Storage, Networking and Technology Services; Bill Veghte, executive vice president, Software; and Jan Zadak, executive vice president, Global Sales. I’ve already taken to calling them the DVZ Trio.
Shaw Wu, a tech analyst with Sterne Agee, in a note issued to clients this morning, said he likes what he sees. Donatelli is effectively the new head of the enterprise business, succeeding the legendary Livermore who had more than once been considered a serious contender for the CEO job. He says that given HP’s renewed emphasis on software Veghte will play a key role as well. “While we believe it is too early to judge whether these changes are for the better or not, we do believe they make sense in streamlining operations and increasing accountability,” Wu writes.
Wu said he’s maintaining his “Buy” rating on HP shares based on their growth prospects in networking, storage and software. He notes that in the most recent quarter, the server business grew 11 percent, networking grew 14 percent and software 17 percent, year on year. “In addition, we now see opportunity to expand services margin back to its previous industry leading levels.”
With HP trading at a valuation of 6.5 times its projected earnings for the 2012 calendar year, he likes the risk. His price target of $53, which would amount to an 18 percent improvement in the share price, is based on the assumption that HP should be valued at closer to 10 times its estimated per-share earnings for 2012. He writes: “In addition, we view HPQ as a fairly defensive play with its recurring profit streams, broad portfolio and geographic exposure and room for operating leverage.”
So far the market is agreeing with him. In pre-market trading, HP shares were up 15 cents to $34.80 as of 8:30 am New York time this morning.