Analysts See Turnaround Under Way at HP, Stay Positive
When Hewlett-Packard disclosed yesterday that it will take a combined $9 billion and change in restructuring charges and writedowns in its services unit, it triggered what will be the biggest single-quarter loss in the company’s history: A loss of about $9 billion on a GAAP basis.
The good news is that before accounting for those huge charges, HP’s business is doing slightly better than expected. It raised its earnings outlook slightly for the quarter ended in July, saying it expects to earn about $1 per share, up from a range of 94 cents to 97 cents previously.
The shares rallied, gaining more than 2 percent and closing at $19.41. The announcement also gave some analysts hope that the slowly unfolding turnaround at Hewlett-Packard under Meg Whitman is entering a new phase: The difficult part where the charges are big and the layoffs and voluntary retirements are plentiful.
Analysts Amit Daryanani of RBC Capital Markets and Shaw Wu of Sterne Agee both saw the move as a positive one. Daryani maintained an outperform rating, the equivalent of a “buy” with a $33 price target, which would amount to a 70 percent boost over yesterday’s closing price. But for now he says the shares will stay in a “penalty box” until HP is done taking restructuring and impairment charges.
Wu at Sterne Agee was surprised by the upward revision in HP’s outlook: “This raise is surprising given the consensus negative view and expectations of a potential miss,” he wrote. “We view restructuring as a positive as the company is taking steps to clean up its balance sheet and reignite growth.”
While HP didn’t say anything about its revenue outlook for the quarter, Wu thinks it will be better than expected. The consensus view had HP expected to report sales of $30.3 billion this quarter. Wu kicked his estimate up a notch and says he sees HP coming in at $30.5 billion. “While the company did not provide details, we believe the EPS beat is based on better than expected revenue, as well as tight cost controls,” he wrote. His rating: “Buy” with a price target of $33.