Deutsche Bank (DB) recommended investors to sell Hewlett-Packard Co. (NYSE:HPQ) shares and switch into Apple Inc. (NASDAQ:AAPL) or International Business Machines Corp. (NYSE:IBM).
The brokerage lowered its 2012 EPS estimate for HPQ to $4.00 on revenue of $122.6 billion from $4.10 on revenue of $125.7 billion and its 2013 estimate to $4.10 on revenue of $121.2 billion from $4.25 on revenue of $126.6 billion. It maintained a "Sell" rating and a price target of $20 on shares of HPQ.
"We cut estimates to reflect deteriorating fundamentals (weak consumer PCs, lower services margins etc) and growing skepticism of a near-term turnaround. Our $20 PT is unchanged (7x 2012 EV/FCF) which is at the low end of its 3-15x historical range (past 5 years). We view this multiple as appropriate given HP's growth and profit profile, increasing macro uncertainty," said Chris Whitmore, an analyst at Deutsche Bank.
HP delivered first quarter revenues/adjusted EPS of $30.0 billion/$0.92, which beat EPS expectations, versus DB at $31.3 billion/$0.86; Street at $30.8 billion/$0.87. However earnings quality was poor and free cash flow of about $300 million missed DB's model by a wide margin.
Whitmore said that with declining revenue trends in all categories (excluding Software) and an eroding margin profile in most business lines, a near-term turnaround looks improbable.
HP suggested a potential turnaround could take 3-5 years. Whitmore said revamping the Services business will be the slowest as it is poorly positioned and requires investment in sales and services capability to move up the value chain and compete more effectively.
Whitmore noted that PC headwinds include weak consumer demand/Tablet substitution, HDD issues for at least another quarter, share losses in EM /European exposure and more formidable competition - Dell Inc.(NASDAQ:DELL), Lenovo and Apple.
"It is undeniable that IPG is in secular decline due to sharply lower supplies revenue, declining unit sales and a shrinking installed base. In aggregate, HP must fight major battles in all its business units (with a relatively meager R&D budget) and there is no visibility on whether HP can reach sustainable growth," Whitmore wrote.
HPQ is trading down 6.19% at $27.15 on Thursday. Over the past 52 weeks, the stock has been trading between $21.50 and $43.85.