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

HPQ_Technical_Update chart