Hewlett-Packard won't see much growth from its core businesses, but the company is likely to show improved earnings and free cash flow amid restructuring and ultimately better employee morale.
Morgan Stanley analyst Katy Huberty upgraded HP to an "overweight" rating based on the company delivering better-than-expected earnings and free cash flow. Revenue growth will still be a challenge, but CEO Meg Whitman's turnaround is on the right track, said Huberty.
In a research note, Huberty said:
First, earnings per share will benefit from the full $2.2 billion in cost savings by the end of fiscal year 2014. Free cash flow will also benefit from $500 million less restructuring cash outflow. Second, we see early signs that employee morale is improving with the higher stock price and leaner infrastructure, which sets up for better execution in businesses like PCs and Services where margins are currently at trough levels. Third, HP printer margins should benefit from a weaker Yen starting in the second half of 2013.
Huberty's note is largely based on the axiom that HP has hit bottom and can't get worse. Revenue growth will be flat in the short run, but products like its upcoming Moonshot server and storage from 3Par can drive sales. Huberty also expects HP's services business to improve.
For now, HP is repairing its balance sheet from the acquisition of Autonomy. That deal cost HP $10 billion in cash.
Other analysts have noted that HP has stabilized. FBN Securities analyst Shebly Seyrafi recently noted that Whitman is fixing and rebuilding the company. The problem? HP will face challenges in services, PCs and printers.