Analyst Sees 75% Upside for Tech Turnaround Stock
Published: Thursday, 23 Aug 2012
By: Katie Little
Tech companies Hewlett-Packard, Cisco, Research in Motion and Nokia are all jockeying to achieve success as a turnaround story, but only a couple have the necessary ingredients, one analyst says.
Although HP’s [HPQ 17.58 -0.055 (-0.31%) ] mixed earnings report rubbed investors the wrong way, one analyst is holding out hope that CEO Meg Whitman can stabilize the company.
The key parts of a turnaround story are stabilizing the business and generating cash, said Shaw Wu, senior technology analyst at Sterne Agree.
Wu emphasized HP’s “very strong cash flow” of nearly $3 billion in its latest earnings report, much of which was used to pay down its net debt. In contrast, Wu said both RIM [RIMM 6.94 -0.125 (-1.77%) ] and Nokia [NOK 3.08 -0.12 (-3.75%) ] do not make money.
On Wednesday, the company delivered a net loss of $8.85 billion — its biggest ever — after a massive writedown of the value of its services business. HP’s full-year guidance also fell short of estimates.
In its first trading session following the report, the company's shares fell 8 percent on Thursday to close at $17.64. Despite the drop, Wu has a $31 price target, implying a 75-percent jump from Thursday's closing price, and a ‘buy’ rating on HP’s shares.
Wu said the ingredients for a successful turnaround include having an installed customer base and a growth plan and building a balance sheet.
“We think HP has the ingredients,” Wu said. “Also, Cisco [CSCO 19.20 0.075 (+0.39%) ] is another name that we also use that in reference to. We think these companies have the ingredients necessary for a turnaround. Now there are other companies like RIMM and Nokia that don’t have quite those things so we think there’s a big distinction.”
Instead, RIM and Nokia “face much more dire futures,” Wu said.
Still, HP will not find the turnaround road instantaneous. Instead, it will be more of a long-term one, another analyst predicts.
“There’s going to be bumps along the road,” said Brian White, a senior analyst at Topeka Capital Markets. “The macro is a risk. They have the biggest Europe exposure of any company that I cover at 36 percent of revenue.”
