Goldman Sachs Remains Sellers Of Hewlett Packard Following Earnings Report

Hewlett Packard HPQ reported 1QFY11 revenues of $32.30 bn, below Goldman's estimate of $32.82 bn and consensus of $32.97 bn. Non-GAAP EPS of $1.36 was ahead of Goldman's estimate and consensus of $1.29. The company issued 2QFY11 guidance that was disappointing versus its estimates and consensus. Management also modestly raised the FY2011 non-GAAP EPS guidance, but lowered full year revenue guidance. Despite this quarter's margin upside, Goldman Sachs believes gross margins are likely to trend downward as the tailwind from PC component cost declines eases in coming quarters. This could make it increasingly difficult for HP to fund its opex investment needs with gross margins, making operating margin pressure increasingly likely in coming quarters. Moreover, Goldman views this quarter's revenue shortfall as merely another sign that the company's cost-cutting actions in recent years may have muted longer-term growth prospects. Key risks include a stronger macro picture in 2011, more rapidly declining component prices, and favorable currency shifts represent key risks to our thesis. Goldman Sachs has a $38 PT on HPQ and Sell rating HPQ is trading lower at $42.74