AmTech analyst Shaw Wu is raising his estimates on Hewlett-Packard (HPQ) after the company yet again somehow reported strong Q2 results in the face of a weakening economy. HP posted $0.86 in EPS on $28 billion in revenue against consensus estimates of $0.83 and $27.4 billion respectively. Wu divides his observations into “Bull” and “Bear” camps:
HPQ continues to execute and exceed expectations, beating consensus revenue and EPS estimates.
Revenue growth was fairly balanced despite weaker printer hardware sales (9%) with printer supplies (16%), services (17%), software (3%), PSG (37%), and ESS (17%) coming in better than expected.
International (68%) sales remained strong driven by Europe (40%) up 16% Y/Y, Asia-Pacific (19%) up 14% Y/Y, and BRIC (10%), up 24% Y/Y.
The operating margin maintained its high level of 10% helped by better than expected operating expenses at 14.4% (AmTech at 14.8%).
The cash balance improved to $14.8 billion from $11.6 billion last quarter, helped by $3.4 billion in cash flow from operations partially offset by $1.6 billion spent on stock buy-backs and $197 million in dividends.
The company anticipates it will be active in share buy-backs post-EDS merger.
The U.S. (32%) grew only 1% Y/Y, against a tough Y/Y comparison, but up a robust 6% Q/Q showing some signs of a rebound.
Printer hardware sales (9%) were somewhat weak driven by a 2% Y/Y decline in units. However, we are not overly concerned as this business is cyclical with supplies (16%) growth at the fastest it has seen in five quarters. We believe HPQ will likely aim to drive units again in future quarters.
Gross margin came in at 24.2%, declining 60 basis points Q/Q due to weaker than expected printer hardware sales, a mix shift towards ISS, but offset by tighter than expected operating expenses at 14.4% (AmTech at 14.8%).
Constant currency revenue growth of 5% not as impressive as 10% reported revenue growth.
Continued strength in the US dollar could serve as a headwind against its international (68%) business but offset by lower costs.
PSG (37%) growth rates continue to decline now at 15%, down from 16% last quarter and 29% a year ago.
Overall, Wu thinks that HP has done extremely well given the challenging macro headwinds, and its international exposure make it an attractive stock. Wu continues to rate HPQ a Buy and reiterates his $56 target.
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