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HPQ
*revs and EPS better than very weak expectations – like we discussed, sentiment got really washed out
*cash generation of $2.6b is good, but not all kosher – large tax benefit, cap ex down to $214 vs $299 last Q and $430m last yr, and so its still ahead of fears but i’d classify it as neutral and not a positive turn yet. payables actually shrank as they reduced their channel inventory needs
*all revenue segments declined which is still a problem, networking (the low end of enterprise) was only positive
*EPS helped better margins in printing on new commercial printers
*inventories, receivables, and debt all look ok
*yes, they “delivered” again, which does matter at this point. the cash generation puts $6b in cash flow as a real possibility which keeps value buyers happy – 6x $6b in cash flow at low end gives us $36b mkt cap which is $18-19 for base case
*nothing exciting on first look – its just a distressed story where they are not doing too much worse.
*saw a UBS upgrade, guys will start calling for the turn in enterprise (recall Cisco was “cautiously optimistic”)
*HPQ is going to push the data center story – won’t sell PCs etc…it all makes sense. we still worry about lots, but in general an improvement would put HPQ on track for $24-26, while it seems fair value is being tracked at $18-19 now based on distressed cash flow, some short covering on earnings pop expected.
some thoughts on the technical outlook below:
- Near term value based on high end of cash flow estimates would be $23-24 at 7x
- Heavy travel / resistance at $25
- Short interest – Short covering remains a driver – as levels remain elevated
- Huge spike staring last Feb and peaking in Nov
- Previous range was 15-33m shares short and a coverage ratio 0.6 to 1.5 days
- Currently there at 74.6m shares short with a coverage ratio of 4.6 days
- This is similar to the September 2012 data prior to the earnings miss and analyst day in Oct 2012. The peak was 106m shares and 5 days coverage
- Technicals
- Reverse head and shoulders bottom runs neckline to $23-25.50
- Moving averages
- 200d $17.27 (breakout on earnings) vs 50d $16.37 and rising
- 8d $18.59 / 21d $17.41 – short term technician supports for up-trending market
- Gap fills – Roughly $17.50 to downside and $22.80 to upside
- Momentum trades
- Carries you into $21.60 to $22.90 range excluding other patterns and support
- Bottom of short term range $18
- Investor base
- Starting in Q3 no tech or growth investor would touch it – it was deep value only, even then we saw some exit in Q4
- Some deep value and yield seeking/distressed buying in Q4/Q1 based on cash flow after the Q4 debacle
- Now you are seeing technical traders, closet value buying, but still few tech or growth – this makes the stock more vulnerable to downswings on any disappointment as there is some fresh money in the name for the first time since last fall – but trend is upward to mid $20s
What have we learned from Zara, Lulu Lemon, and Costco?
These are three retailer play in different parts of the retail market but do share some very good qualities that help them to thrive in this era of ecommerce and rapid commoditization.
1) private label – you get it here only, high quality
2) happy places, emotional connections – shopping at a store is no longer a necessity, make me want to be there
3) curated content / selection – expertise
4) size or speed – Costco or Zara
Contrary to the (finally) growing sentiment that ecommerce will completely wipe out retail, we feel it is going to force retail to improve to the point that the experience of shopping will improve and people will continue buying from retail. That said, the in store experience will need to dramatically change in some cases.
Competing with endless inventory is difficult and we see three options; a) make it obsolete, b) make it too differentiated (or proprietary), c) make it emotional or experiential.
We will dive into this topic at a later date – but as we watch the likes of JC Penny, Sears, Best Busy and Radio Shack fall apart -it is important to understand not that the low prices of ecommerce drove them out of business but that the low prices of ecommerce drove a change in the behavior of consumers – what we were willing to tolerate, what we realized we wanted, and what new trade offs were available. For an existing retailer, the future is not just about have an ecommerce presence… like having just a website wasn’t enough ten years ago. You need to use that platform to drive connections. Leverage the platform to improve your offerings. Examples are popping up already in terms of build your own nutrition bars to to a jean store with a massive selection and no inventory. Retail is far from dead…it’s more that the consumer finally woke up and left the cave.
The Change Investor 