Wells Fargo analysts had just attended an investor relations event at HP Discover in Las Vegas, and they had a few general corporate takeaways from the session:
- The separation is on track by November 1 with systems separation by August 1; most of major milestones that would threaten the split are behind them,
- Budgeting for the next year is underway and, until completion, will not have a definitive FY16 outlook; an outlook will be provided in the fall at its Securities Analyst Meeting,
- Large M&A is now unlikely until the split as resources are focused on the separation,
- Preliminary Form 10 in early July (though we believe the more detailed information we will be looking for may not be available until later),
- Not expecting significant disynergy in procurement or supply chain caused by the separation,
- Revenue opportunities through partnerships that may have been unlikely as a single entity (example, systems integrators that want to use HP printers but would not because HP Enterprise Services is a competitor),
- Management indicated they have identified a number of divestiture opportunities though they were unlikely until post-separation.
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Overall, HP has the opportunity to attain some growth through new partnerships, which was not possible while it was a single entity. Currently, the industry PC channel inventory is slightly elevated and, according to Wells Fargo, HP is comfortable with the quality of channel inventory and expects to potentially raise inventory to avoid any potential disruption during the separation. Also ink supplies are expected to bottom this year, followed by laser after.
Wells Fargo had a few takeaways for HP specifically:
We felt management was particularly confident around its Enterprise Services business particularly around 1) near-term Services margins of 4%-6%, 2) long-term Services margins of 7%- 9%, and 3) FH2 revenue growth driven by new contracts. Management also noted that the $2B restructuring would have happened regardless of the separation.
The stock has a consensus analyst price target of $40.47, which falls within the Wells Fargo valuation range of $40 to $43. The brokerage firm bases its valuation on an 11-times multiple of its 2015 earnings per share estimate of $3.71. The call implies an upside of 28% from the top end of the valuation range, compared to current prices.
Accordingly, Wells Fargo gave its investment thesis as:
We believe HP will likely see multiple expansion in FY15 given the likelihood of bottoming in several of its legacy businesses, a potential event catalyst and lower current multiple vs. its peers.
Shares of HP were down about 1.5% at $33.46 Thursday morning. The stock has a 52-week trading range of $31.00 to $41.10.
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