Hewlett Packard company

Transcription

1 February 25, 2015 Hewlett Packard company Current Recommendation Earnings Update: Hewlett-Packard Reports Q1 Results SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 09/01/2013 Current Price (02/24/15) $38.49 Target Price $ Week High $ Week Low $28.91 One-Year Return (%) Beta 1.53 Average Daily Volume (sh) 9,419,706 Shares Outstanding (mil) 1,827 Market Capitalization ($mil) $70,340 Short Interest Ratio (days) 2.75 Institutional Ownership (%) 77 Insider Ownership (%) 0 (HPQ-NYSE) SUMMARY Hewlett-Packard reported mixed first-quarter fiscal 2015 results wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same. Also, year-over-year revenues compared unfavorably primarily due to foreign currency headwinds. The company also provided tepid second-quarter and fiscal 2015 earnings guidance. However, H-P s cost cutting initiatives and improvement in the PC segment were the positives in the quarter. The company s traction in the cloud, security and Big Data segments are expected to be the growth catalysts, going forward. We believe that Hewlett-Packard s strategic focus on the software business will help it to diversify its revenue source, which is still predominantly dependent on PCs. Nonetheless, macroeconomic challenges and tepid IT spending remain the near-term concerns. Thus, we reiterate our Neutral recommendation on H-P. Risk Level * Average, Type of Stock Large-Blend Industry Comp-Mini Zacks Industry Rank * 106 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Jan) (Apr) (Jul) (Oct) (Oct) Annual Cash Dividend $0.64 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) -2.6 Earnings Per Share (%) -5.4 Dividend (%) 18.0 P/E using TTM EPS 10.3 P/E using 2015 Estimate 9.7 P/E using 2016 Estimate 9.4 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page ,359 A 27,582 A 27,226 A 29,131 A 112,298 A ,154 A 27,309 A 27,585 A 28,406 A 111,454 A ,839 A 26,904 E 27,315 E 28,528 E 109,586 E ,287 E 109,087 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Jan) (Apr) (Jul) (Oct) (Oct) 2013 $0.82 A $0.87 A $0.86 A $1.01 A $3.56 A 2014 $0.90 A $0.88 A $0.89 A $1.06 A $3.74 A 2015 $0.92 A $0.96 E $0.98 E $1.09 E $3.95 E 2016 $0.96 E $4.11 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 RECENT NEWS Hewlett-Packard Tops Q1 Earnings, Lags Sales; Q2 View Soft Feb 24, 2015 Hewlett-Packard reported non-gaap earnings of $0.92 which beat the Zacks Consensus Estimate by a penny. Reported earnings increased 2.2% from the year-ago quarter and were toward the higher end of management s guided range of $0.89 to $0.93 per share, primarily due to cost control measures and lower share count. H-P reported revenues of $26.8 billion which decreased 4.7% year over year and lagged the Zacks Consensus Estimate of $27.4 billion. The downside was primarily due to unfavorable foreign currency exchange rates. Notably, the company generates approximately 65% of revenues from outside the U.S. Also, lower sales in the Printing, Enterprise Services, Software and HP Financial Services businesses impacted quarterly s revenues. Segmental Revenues Personal Systems revenues increased 0.2% year over year to $8.54 billion, primarily due to higher-thanexpected growth in notebooks and continued products rollout. The company also recorded a 9% yearover-year increase in total unit shipments. Revenues from notebooks were up 9% year over year, while unit sales increased 21% from the year-ago quarter aided by higher sales of convertible notebooks. However, Desktop revenues decreased 10% from the year-ago quarter, while units sold declined 7% on a year-over-year basis. Commercial revenues were down 1% year over year. Nevertheless, the expiration of the Windows XP operating system in commercial revenues was a positive. The Consumer segment increased 2% year over year. Printing revenues were down 4.7% year over year to $5.54 billion, primarily due to 5% decline in supplies revenues and weak performance by the hardware segment. H-P s total hardware unit sales were down 4% year over year, primarily due to 6% decline in consumer unit shipments. Commercial hardware units, however, remained flat year over year. Also, lower-than-expected demand in Russia impacted the revenue in this segment. Revenues from the Enterprise Group were up only 0.2% from the year-ago quarter to $6.98 billion, primarily due to lower revenues from Business Critical Systems (down 9%), Technology Services (down 5%) and Networking (down 11%), which more than offset the revenue increase in Industry Standard Servers (up 7%). Storage revenues, on the other hand, were flat on a year over-year basis. Enterprise Services revenues were down 10.8% year over year to $4.99 billion, impacted by main account run-off and weakness in Europe, the Middle East and Africa (EMEA). Revenues were impacted by 11% decline in each Application and Business Services and IT Outsourcing revenues. Software revenues were down 4.9% year over year to $871 million primarily due to a decrease in License revenues (down 16%) and Professional services revenues (down 7%). On the other hand, Support revenues and SaaS revenues were flat with the year-ago quarter. The company reported strong bookings in IT Management. HP Financial Services revenues declined 7.7% year over year to $803 million primarily due an early contract termination. Also, 1% decline in net portfolio assets impacted the segment. However, financing volume increased 14% year over year. Equity Research HPQ Page 2

3 Operating Results H-P s gross margin was up 55 basis points (bps) on a year-over-year basis to 23.4%, primarily due to improvements in the Personal Systems segment and lower cost of service. H-P s non-gaap operating expenses were down 3.1% from the year-ago quarter to $3.89 billion, primarily due to lower selling, general and administrative expenses. As a percentage of revenues, expenses went up 24 bps, primarily due to higher investments in research and development. Non-GAAP operating margin increased 33 bps year over year to 8.8%, primarily due to favorable market opportunities coupled with cost control measures. H-P s non-gaap net income came in at $1.71 billion or $0.92 per share compared with $1.74 billion or $0.90 reported in the year-ago quarter. Balance Sheet and Cash Flow The company ended the first quarter with $12.92 billion in cash and cash equivalents versus $15.13 billion in the previous quarter. The company had long-term debt of $15.55 billion compared with $16.04 billion in the last quarter. H-P generated $744 million in cash from operations. During the quarter, the company repurchased shares worth $1.57 billion and paid dividends of $304 million. Guidance H-P expects its non-gaap earnings per share for second-quarter 2015 to range between $0.84 and $0.88. The company expects strong momentum in Personal Systems buoyed by strength in its product line-up in the second quarter. Also, the company believes that supplies revenues in the Printing segment will stabilize in fiscal Furthermore, the company expects strong momentum in enterprise group aided by Gen9 line-up and server refresh cycle. According to H-P, fiscal 2015 earnings per share are likely to range within $3.53 $3.73 (previous guidance was $3.83 $4.03). The company also expects full-year revenues to decline 4% to 6%. In first quarter, the company laid off approximately 2,800 people, bringing the total employee strength to roughly 44,000 to-date. The company targets 55,000 job cuts by the end of fiscal Equity Research HPQ Page 3

4 VALUATION H-P s shares are currently trading at 10.3X TTM earnings, a discount to the industry group average of 29.5X and the S&P 500 average of 18.4X. However, this is above the mid point of the historical range of 3.2X to 13.4X TTM earnings, which indicates limited possibility of an upward movement. Moreover, the shares are trading at a discount based on our 2015 forward estimates. The current 51.7% discount to the industry average for 2015 is less than the average discount for the historical period of 77.6%, which indicates some downside from current levels. Therefore, some caution is justified. Hence, we reiterate our Neutral recommendation on H-P and set a price target of $ Key Indicators P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF P/E P/E 5-Yr High P/E 5-Yr Low Hewlett-Packard Company (HPQ) Industry Average S&P Apple Inc. (AAPL) D Systems Corp. (DDD) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Hewlett-Packard Company (HPQ) Industry Average S&P N/A 2.1 N/A Equity Research HPQ Page 4

5 Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research HPQ Page 5

6 OVERVIEW Founded in 1939 and headquartered in Palo Alto, CA, Hewlett-Packard Company (HPQ) or H-P is a leading global provider of computing products, technologies, software, solutions and services to individual consumers, small and medium-sized businesses (SMBs) and large enterprises, including those in the public and educational sectors. The company s offerings include personal computing and other access devices, imaging and printingrelated products and services, enterprise information technology infrastructure such as enterprise storage and server technology and software that optimize business technology investments and multi-vendor customer services such as technology support and maintenance, consulting and integration, and outsourcing services. H-P s operations are organized into seven reportable business segments: Personal Systems; Printing; Services; Enterprise Group (EG), Enterprise Services (ES); Software; HP Financial Services (HPFS); and Corporate Investments. The business structure was realigned in 2012, combining the Personal Systems and Printing segments as Printing and Personal Systems Group (PPS). However, PPS is not a financial reporting segment. Revenue Segments % 20% 3% 21% 29% 3% 0% Personal Systems Enterprise Group Software Corporate Investments Printing Enterprise Services HPFS Personal Systems: This segment provides commercial PCs, consumer PCs, workstations, mobile devices (notebooks), calculators and related accessories, software and services for the commercial and consumer markets. In fiscal 2013, this segment comprised 29% of total revenue. Printing: This segment provides consumer and commercial printer hardware, supplies, media and scanning devices. H-P s printing segment also provides imaging solutions. In fiscal 2013, this segment comprised 21% of total revenue. Enterprise Group (EG): This segment provides custom-made server, storage and networking products for enterprises and small and medium businesses (SMB). H-P s Converged Infrastructure portfolio of servers, storage and networking with the Cloud Service Automation software suite forms the HP CloudSystem. This combined solution enables enterprise and service-providers to deliver infrastructure, platform and software-as-a-service (SaaS) in private, public or hybrid cloud environments. EG includes two reporting units Enterprise Servers, Storage and Networking (ESSN) and Technology Services (TS). In fiscal 2013, this segment comprised 24% of total revenue. Equity Research HPQ Page 6

7 Enterprise Services (ES): H-P s Services segment provides consulting, outsourcing and technology services across different business domains. This segment is subdivided into Infrastructure Technology Outsourcing, Technology Services and Application and Business Services. In fiscal 2012, this segment comprised 20% of total revenue. Software: H-P s Software solutions deliver information management solutions (for both structured and unstructured data), IT management software Big Data and security intelligence/risk management solutions to enterprises. H-P s Big Data solutions include data solutions include the HP HAVEn Big Data Platform along with the Autonomy and Vertica products. These solutions are delivered in the form of software licenses, SaaS, hybrid or appliance deployment models. In fiscal 2013, this segment comprised 3% of total revenue. HP Financial Services (HPFS): This segment offers enterprises SMBs and educational and governmental entities a wide range of financial services. The services range from leasing, financing, utility programs and asset recovery services. H-P also provides financial asset management services. In fiscal 2013, this segment comprised 3% of total revenue. Corporate Investments: H-P s Corporate Investments includes business intelligence solutions, HP Labs, the webos business and business incubation projects. H-P conducts its business in a highly competitive environment. In the Personal Systems Group, H-P faces competition from Lenovo, Dell Inc., Acer Inc., Apple Inc., Toshiba Corporation and Samsung Electronics Co., Ltd., while in the Printing segment it has to compete with the likes of Lexmark International, Xerox Corporation and Seiko Epson Corporation. Moreover, in the Enterprise Group, enterprise technology infrastructure providers such as International Business Machines Corporation (IBM), Dell, EMC Corporation (EMC), Cisco Systems, Inc. and Microsoft are the primary competitors of H-P. Companies such as IBM Global Services, Computer Sciences Corporation and Accenture compete with H-P in the Enterprise Services segment. In the Software segment, H-P has a host of competitors such as Adobe Systems Inc., IBM, EMC and Oracle to name a few. REASONS TO BUY H-P is among the bellwethers in the technology sector and has a broad product portfolio. The company deals in printers, personal computers (PCs), software, services and information technology (IT) infrastructure. H-P is a market leader in PC shipments in the U.S. and EMEA and the second largest player worldwide (Gartner estimates). H-P remains the leader in server shipments despite the fact that revenues declined from the year-ago period, per IDC. The company is also one of the largest sellers of printers. H-P has deployed additional sales resources to capture incremental opportunities in the enterprise and other markets, which has resulted in a diverse global customer base. It has been successful in maintaining its track record as a leading IT company over a period of time. H-P s shift to a high-margin software and services business is expected to boost results in the long term. Its traditional PC business is given to commoditization, which makes it easier for cheaper Asian companies to enter the market. Therefore, H-P s decision to take a software-and-service centric approach is a strategic move. The fact that traditional PCs are being cannibalized by tablets and other MIDs makes this transition imperative. The company is witnessing growth across its converged infrastructure and the emerging area of software-defined data centers. The company is witnessing rapid adoption of HP Moonshot servers, 3PAR storage and the HP CloudSystem. Equity Research HPQ Page 7

8 Moreover, solid demand from its cloud, security and big-data solutions and services are expected to be the revenue drivers. H-P s restructuring plan is expected to yield benefits in the long term. In its last-reported quarter (second-quarter 2014), H-P confirmed that approximately 31,400 people had been laid off since the program started in Per H-P s new estimates, the company is expected to cut its workforce by 45,000 50,000, up from 34,000 as planned in the 2012 restructuring initiative. The company now expects to save another $1.0 billion per year from fiscal 2016 in addition to the original forecast of $3.5 to $4.0 billion. Part of the savings will be reinvested in the business. These initiatives are expected to increase expenses by $500.0 million in fiscal 2014 due to the charges related to workforce reduction. H-P is benefiting from the restructuring plan as its operating expenses decreased 1.8% year over year during the first six months of fiscal 2014 due to savings from the labor restructuring initiative and better alignment of costs to revenues. Moreover, H-P intends to reinvest the majority of the savings from restructuring into the business to foster innovation, particularly in cloud, Big Data analytics, and information management and security segments. The company has always made strategic acquisitions to expand its horizon and broaden its area of activity. The company has acquired new technologies, forayed into new geographical regions and accessed better infrastructure through strategic acquisitions. Moreover, management hinted that it is keen on acquiring smaller companies whose products and solutions complement its present business. We believe that H-P will expand its cloud and Big Data solutions portfolio through acquisitions as it is a relatively late entrant in the segment. H-P s strong operating cash flow of $5.98 billion, reported in the first six months of fiscal 2014, has helped it to return cash to investors. The company expects to return 50% of the free cash flow in the form of share repurchases and dividends. As of Apr 30, 2014, H-P paid $576.0 million through dividends and bought back shares worth $1.39 billion. The company has $6.2 billion remaining for future share buybacks. These shareholder-friendly initiatives not only instill investors confidence but also boost earnings. REASONS TO SELL H-P s PC business remains an overhang. The company is seeing secular declines due to the increasing movement to tablets where H-P is yet to gain a foothold. As the computing business generates a significant portion of its revenues, the reduction in business volume in this segment is a major cause of concern. Thus far, H-P has neither been able to dispose of this business due to its significant revenue contribution, nor make up for revenue declines in this business by generating sufficient volumes from other businesses. However, in the last reported quarter, H-P s revenues from the PC business increased on a year-over-year basis primarily aided by the commercial segment. Growth in commercial revenues was driven by robust performance of its commercial desktops and notebooks. The ongoing upgrade of H-P s installed base and the expiration of the Windows XP operating system is also expected to support H-P s PC segment in the near term. However, According to IDC s latest report, shipments are expected to decline 6.1% in 2014, better than 9.8% decline in the previous year, primarily due to stabilization in the U.S. economy, with tablet cannibalization tapering off. Nonetheless, the continuous decline in PC shipments raises a question regarding the future of the PC industry. The decline will impact the business prospects of the companies relying substantially on PC sales. Despite the progress made by H-P within its Software and Services business, the company faces a challenging situation. The company competes with IBM, which has much larger global services and software businesses and a strong position in the servers and storage market. Apart from this, H-P encounters aggressive competition in all areas of its business. Some of its largest competitors Equity Research HPQ Page 8

9 include IBM, EMC Corporation, Network Appliance, Dell, Sun Microsystems, Accenture, BMC Software, Acer, Apple, Toshiba Corporation, Canon USA, Lexmark International, Xerox Corporation, Seiko Epson Corporation and Samsung Electronics. H-P has been serving the government vertical for a long time. The breadth of deals gives the leading PC vendor a wide exposure to this space. Though revenue streams from this sector are somewhat regular, the risks posed by low-margin businesses and federal budget cuts are high. Around 64% of the company s revenues come from businesses outside the United States. Thus, an economic condition which impacts the foreign currency exchange rates does result in transaction exposure, which leads to profit fluctuation. Although we believe that a local or constant currency basis is better for sales analysis, it might affect the growth number. Equity Research HPQ Page 9

10 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of HPQ. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 8.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research HPQ Page 10