Gloom Around HP Deepens After Wall Street Analyst Downgrade


The challenges facing Hewlett-Packard's PC, services and printer businesses, as well as its planned re-entry to the smartphone and tablet markets, have prompted a prominent Wall Street analyst to cut his rating and target price for HP shares.

In a research note to clients Thursday, Jefferies & Co. analyst Peter Misek said given the failure of HP's $1.2 billion acquisition of Palm and the $3.3 billion in goodwill and inventory write-offs that followed, a renewed mobility push could backfire.

"While the move makes sense strategically, we see it as a high risk move," Misek said in the research note. "On top of adding costs and working capital burdens to an already stressed balance sheet, there could be additional write-offs."

Misek downgraded HP shares from "Hold" to "Underperform" and cut his target price for HP shares from $17 to $14. For HP's fiscal 2013, which ends Oct. 31, Jefferies & Co. is forecasting earnings of $3.58 per share, compared to Wall Street's consensus of $4.22 per share.

[Related: CEO Whitman: HP Will 'Ultimately Offer A Smartphone']

Of all the PC OEMs that have tried their hand at tablets and smartphones, only Apple's iPhone and iPad, as well as Lenovo's low-cost Android devices in China, have seen success in the marketplace, Misek said in the research note.

HP CEO Meg Whitman raised industry eyebrows earlier this month in revealing that HP is mulling a return to smartphones. "My view is, we have to ultimately offer a smartphone because in many countries of the world, that is your first computing device," Whitman told Fox Business Network last week.

HP's PC sales to businesses will not receive a significant boost from the arrival of Windows 8, and PC sales overall will continue to be dampened by the cannibalization effect from tablets, Misek said in the research note.

HP's printer business will continue facing reduced demand, and the expiration next year of high-end server maintenance contracts in HP's Business Critical Systems unit, from which HP derives some $2 billion in annual profit, could pose further challenges, according to Misek.

HP, which last month wrote down $8 billion from its 2008 acquisition of EDS, will write off half of the $6 billion goodwill from last year's Autonomy acquisition due to the poor performance of the unit, Misek said in the research note.

HP last week denied that it is looking to sell its EDS business to potential buyers, as earlier reported by CRN. Brian Alexander, director of technology research at Raymond James & Associates, believes HP could get around $5 billion for EDS but will likely have a tough time finding a buyer.

HP shares are down more than 33 percent this year and are currently trading at their lowest levels in a decade.

PUBLISHED SEPT. 27, 2012