Citi is out with an agressive Buy call on Hewlett-Packard (HPQ) after the company’s share price collapsed today following its EDS buyout announcement. Citi notes that HPQ lost more market capitlization today than the total purchase price of EDS, which Citi says is a clear overreaction:
While HP does face slowing industry growth, more stable component pricing and a more stable dollar going forward, we believe these factors are more than fairly reflected in consensus estimates and the share price.
The price drop is particularly unwarranted given solid preliminary 2FQ08 results in which management reported a “solid performance across business segments…” (results that it obviously reported in a vain attempt to stop the plunge in the stock):
Preliminary April quarter revenue and non-GAAP EPS of $28.3B and $0.87 were essentially in line with our above-consensus estimates of $28.2B and $0.88, and mgmt cited “solid performance across business segments and strong cash flow from operations.” 3FQ08 revenue and EPS guidance was in line with consensus, but strikes us as conservative.
Finally, Citi offers some colour on the EDS deal. It’s optimistic about cross-selling opportunities and synergies in both company’s product development efforts:
The EDS acquisition was unexpected, but strategically and financially compelling, in our view. There is minimal overlap between HP’s existing services offerings and EDS’. Customer overlap is also minimal. The deal should create cross-selling opportunities and boost confidence in EDS as a service provider. There should be synergies between HP’s product development efforts and EDS’ services offerings. Finally, while our analysis suggests that the deal is at least neutral to non-GAAP EPS in yearone without synergies because HP is funding the deal with cash and debt, Mark Hurd was very clear that there are “significant cost synergies” and even some revenue synergies. We concur.
Shares remain Buy rated and target price remains at $64. Deutsche Bank, meanwhile, hates the deal and thinks it will be dilutive.
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