Citi Comments On HP Following Weak Earnings Report; Lowers PT

Hewlett Packard's HPQ 1FQ11 revenue results and FY11 revenue guidance were uninspiring. HP remains aggressive buyers of HPQ on this pullback. It believes the larger-than-expected shortfall in consumer PCs is a product of HPQ's determination to reduce channel inventories ahead of Intel's Sandy Bridge transition, and continue to expect PC growth reacceleration as FY11 progresses. While Services product and sales issues will likely take several quarters to fix, this seems more than fairly reflected in 2FQ EPS guidance. At $42 in after-market trading, HPQ shares now trade at just 8x FTM non-GAAP EPS despite double-digit EPS growth, double-digit FCF yield and 60% recurring operating profit. Citi's revised TP from $70 to $65 suggests 55% upside potential. Consumer PC growth has been anemic since spring 2010 as consumers took a breather following four years of laptop buying frenzy. This weakness was compounded for HP by a consumer PC quality issue in China. Citi's sense is that the recovery for HP in China has taken longer than expected, necessitating channel inventory clearance in the country during 1FQ11 ahead of Intel's Sandy Bridge transition. Citi has a Buy rating on HPQ HPQ closed Tuesday at $48.23