Hewlett-Packard (HPQ): Bounce?

Hewlett-Packard (NYSE:HPQ) got taken to the back and shot last night after posting somewhat weaker than expected #’s & guidance.

Despite the 12% (6 pt) haircut we have almost every Tier-1 firm out defending HPQ this morning, telling clients to buy the weakness.

– J.P. Morgan reits OW and $55 tgt (prev. $57) noting enterprise systems (servers, storage, and networking) performance was much stronger than expected, but it was more than offset by weakness in PCs and services. The near-term stock performance could be bumpy owing to a reset to revenue growth at a time when investors are not taking kindly to any decliners. They expect the pain to be rendered temporary, though, as HP’s models should benefit from an increasing mix shift to the enterprise and a resilient operating margin profile.

JPM thinks HP could surprise to the upside strategically. They also believe that HP’s outlook is a function of part end markets, part execution, meaning remedies could be in the making. Next catalysts are 1) the HP Summit and 2) potential acquisition that is deemed strategically sound.

– Morgan Stanley: F1Q Blemishes Create Buying Opportunity. Weaker demand and execution issues in consumer PCs and application outsourcing drove a F1Q / FY11 revenue miss and guide down. The execution issues will impact the stock near-term but they continue to believe that HP can invest in R&D and sales coverage without lowering its operating margin in light of the mix shift to higher gross margin products like networking and storage. Firm views HP as a sum of the parts story in the medium-term with its Enterprise business alone worth $44 (1.7x FY10 Revenue). They’re buyers of the stock below $44 as they believe no value is attributed to the $66 billion PC and Printer segment at those levels, more than discounting secular risks. Reits OW & $57 tgt.

– UBS: Counting on the Second Half. Firm reits Buy and $52 tgt noting catalysts for more material multiple expansion likely pushed back… …but still anticipate more refined strategy & catalysts in FY2H. UBS expects HP’s “new” strategy to highlight a focus on leveraging one of the broadest portfolios in the IT space to take advantage of mkt trends (ex. cloud computing, solutions sales). Additionally, they believe drivers to FY2H are largely still in place (webOS sell-in ramp, some services improvement, pot’l China PCs).

– Citi: Compelling Value for Double-Digit EPS Growth; Buy on Weakness. While 1FQ11 revenue results and FY11 revenue guidance were uninspiring, they remain aggressive buyers of HPQ on this pullback. Citi believes the larger-than-expected shortfall in consumer PCs is a product of HPQ’s determination to reduce channel inventories ahead of Intel’s Sandy Bridge transition, and they continue to expect PC growth reacceleration as FY11 progresses. While Services product and sales issues will likely take several quarters to fix, this seems more than fairly reflected in 2FQ EPS guidance. At $42 in after-market trading, HPQ shares now trade at just 8x FTM non-GAAP EPS despite double-digit EPS growth, double-digit FCF yield and 60% recurring operating profit. Citi’s revised TP of $65 (from $70) suggests 55% upside potential.

– Barclays: HP’s first full quarter with a new CEO was clearly disappointing, given the weakness in services and downside guidance for the rest of the year. That said, EPS expectations do not move too much lower given higher margins, and it seems shares will open at close to trough valuation. Based on cash flow multiples, the firm believes the stock could see some support in the low $40s at 9-10x FY11 FCF. Maintains Overweight and $49 tgt.

– Bernstein: Credibility Undermined and Fears Reignited… Time to Build Positions. HP’s stock retreated 12% in the aftermarket, and is likely to be in penalty box in the near term, particularly since CEO HP Apotheker stated that investors should not expect “financial targets” at his Strategy Summit on March 14. Firm believes that a pull-back provides a buying opportunity in HP, given the resiliency of HP’s business model – an estimated 56% of the company’s profits are recurring/annuity like –and Bernstein’s belief that the company can grow EPS ~10% annually longerterm. Given its financial profile, they maintain that HPQ is very inexpensive at its current valuation, trading at 8x FY11E EPS.

While there may be no catalyst for HP’s stock near term, they would use any pullback in the name today to add to positions.

Notablecalls: Leo Apotheker is the new CEO. The thing with new CEOs is that they almost always try to reset expectations a bit lower than they actually believe they can accomplish. This is tied to winning credibility and sometimes gaming the options.

Buying HPQ here @ $43 is a textbook bounce trade. Shooting for $44-45

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