The Street’s concerns about Hewlett-Packard continue to grow.
The computing giant, which received at least 10 analyst downgrades following the company’s recent April quarter financial report, this morning was whacked again, this time by Morgan Stanley analyst Kathryn Huberty. she cut her rating on the company to Equal Weight from Overweight, in particular citing concerns about how the IT sector’s adoption of cloud computing will affect the company’s server business.
“we continue to believe HP has the opportunity to unlock value by divesting low growth/low margin businesses and investing in high growth/high margin enterprise software, networking and storage,” Huberty writes in a research note. “However, with a structural catalyst likely 12+ months out, we see a growing number of near-term headwinds that make us more cautious … in addition to slower PC and printer growth, we now see slower growth in x86 servers and traditional outsourcing as enterprises adopt cloud computing.”
Huberty sees a divergence in the server market, with a 1% decline this year in server shipments into company-owned data centers, while managed hosting and cloud server shipments grow int he double digits. But she sees trouble for Dell and HP in servers as low-cost Asian computer makes like Quanta and Wistron take “increasing cloud server share.”
Huberty shifted ratings on several other stocks this morning:
- Salesforce.com: Raised to Overweight from Equal Weight, with a $200 price target. Huberty writes that she sees “cloud-based workloads” grown 50% compounded for the next three years, much stronger than the 20% growth reflected in consensus estimates for Salesforce. she contends that “CRM has the broadest ability to participate in this move which is accelerating.”
- Teradata: Upped to Overweight from Equal Weight, with a $65 target. “Teradata is well-positioned in the fast-growing business analytics market,” she writes. “Our convictionis driven by recent investments in new sales territories and analytics appliances, which allow TDC to expand its addressable market and hit our above Street forecasts even without growth from its core business.” The stock was added to Morgan Stanley’s best ideas list.
- QLogic: Rating cut to Underweight from Equal Weight, with a target of $15.50. she says a move to cloud computing will hurt the company’s top-line growth. “Enterprises are increasing server workload deployments in public clouds and managed hosting services vs. on-premise data centers, according to our proprietary survey of over 300 IT decision makers,” she writes. “we expect this mix shift in workloads, coupled with increasing server virtualization penetration, to lead to a -1% CAGR for on-premise server shipment from CY10-13, while shipments into public cloud and managed hosting sites grow 61% and 12% CAGR over the same period.” she adds that “QLGC is hardest hit in our coverage by this mix shift in server shipments. The company’s host products, which account for over 70% of total revenue, is mainly deployed in on-premise data centers, connecting servers to storage networks.”
Meanwhile, Bernstein Research analyst Toni Sacconaghi proposes in a research note this morning that HP should consider an accelerated stock repurchase plan as a way of boosting sentiment on the company’s shares.
“Share repurchases have been a material contributor to HP’s EPS growth over the last several years, and we believe they should be an integral part of HP’s financial model going forward,” he writes. “given its huge and diversified revenue base, we believe that HP should espouse a financial model similar to that of IBM’s, with modest (3-4%) revenue growth, ongoing operating margin improvement, and share buybacks combining to deliver ~10% EPS growth.”
Sacconaghi notes that the stock has becoming seriously cheap. “we note that HP’s stock price is at a 4 year low (other than during the financial downturn) and is currently trading at about 7x FY11 EPS, its lowest relative level in over 15 years,” he writes. “Moreover, HP is 20%+ less expensive than any other top 20 tech company by market cap, which is material, given that the cohort is collectively very inexpensive versus its history. Moreover, repurchasing shares now – while the stock is inexpensive – will allow the company to buyback more shares than if the company waits and the stock begins to appreciate.”
Sacconaghi thinks the company should consider a debt-funded $10 billion accelerated stock repurchase, a move he says would boost FY 2011 EPS by 27 cents, and FY 2012 by 39 cents.
In today’s trading:
- HPQ is up 13 cents, or 0.4%, to $35.94.
- CRM is up $3.88, or 2.7%, to $149.18.
- TDC is up 48 cents, or 0.9%, to $54.23.
- QLGC is down 83 cents, or 5%, to $15.90.