This morning Goldman Sachs is making a key change to its PC uinverse coverage. Dell (NASDAQ:DELL) is being added to the Conviction Buy List, and rival Hewlett-Packard (NYSE:HPQ) is being removed from the Conviction Buy List. Goldman Sachs added Dell to its Buy list back on March 26 with expectations for catalysts over a 12 to 18 month period. Goldman now sees a series of fairly immediate catalysts that could propel shares to its revised target of $35 (prior $33):
- The new retail partnerships with Staples and Wal-Mart (with more to come) should add $500M to $1B over the next year in revenues.
- Favorable DRAm costs should keep near-term margins higher than modeled.
- Dell’s NOV. 12 SEC Filing should unlock share buybacks (Goldman believes around $8 Billion).
- Its tax rate should actually come down.
- For these reasons the 2008 EPS estimates from Goldman Sachs were raised to $1.77 EPS vs $1.74 prior estimate.
- Goldman also noted that Dell only needs 7% revenue growth to delivery on 20% EPS growth.
Both Dell and H-P were maintained with BUY rating, so this is a relative upgrade this morning. They expect upside here as well. It even noted that it expects H-P to beat its $0.82 EPS target for the October quarter with increases to 2008. This noted that H-P was up 24% since the FEB 8, 2007 add to the Conviction Buy List, versus 6% on the S&P 500.
So this might not be a true a downgrade, but it appears that Goldman Sachs is seeing more upside at Dell over H-P from here.
Jon C. Ogg
October 29, 2007
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