HPQ: Goldman Cuts to Sell; PC Trends Deteriorate Further

As I mentioned earlier, Goldman Sachs hardware analyst Bill Shope today cut his rating on shares of Hewlett-Packard (HPQ) from Neutral to Sell, after cutting his estimates for personal computers this year, writing that the sentiment about the stock has “moved ahead of reality.” Shope maintains a $16 price target.

HP shares are down $1.40, or 6%, at $21.91. (Shope also cut estimates for Apple (AAPL) and for Dell (DELL).)

In an overview note, Shope cut his PC estimate to a decline of 3.8% in unit shipment terms this year, to 337.19 million units, worse than a prior view for a half-point decline, writing that “we believe that end demand continues to weaken and data points continue to suggest a more difficult near-term environment.”

Shope actually sees the second half of this year as being a little better, with shipments rising 11.8%, better than his prior 11.5% rise, after a decline of 9.7% in the first half, above the 6.4% decline he had previously forecast. He sees unit growth of 2.6% in 2014, below his prior 2.8% estimate, with 346 million units in total.

Shope doesn’t say where he’s gained insight into PC trends. He argues pricing is an even bigger worry:

While most investors have focused on weakening PC unit trends, we also continue to believe that PC pricing represents the primary near-term risk for PC OEMs. We believe that weak unit shipments will further pressure vendors to price more aggressively to help trigger demand elasticity.

Part of that price pressure will come from tablet computers, writes Shope: He now models shipments of 185.4 million this year, up 44.4% from last year, and above a prior estimate for 175.4 million, driven by “the additional of new form-factors and lower price points.”

“We forecast that tablets will be 40% cannibalistic in 2013 and 2014.”

Regarding HP, Shope cut his fiscal 2013 estimate, for the year ending October, to $113.2 billion in revenue and $3.26 per share in profit, down from a prior $113.37 billion and $3.32 per share.

The Street is wrong, writes Shope, to assume the worst is over for HP, when fundamentals have still to bottom:

We believe HP�s CEO, Meg Whitman, and her team have appropriately cautioned that the current turnaround is a multi-year effort. Nevertheless, we believe consensus is attributing an unreasonably high probability to the turnaround�s success and incorrectly assuming fundamentals have already bottomed. In contrast, we believe EPS expectations could face downward revisions in coming quarters and that any recovery in earnings power will be muted through FY2014. We also believe the current restructuring actions will be largely countered by incremental weakness in PCs, enterprise hardware, services and printing in FY2013. Moreover, we believe the company�s reinvestment needs remain pronounced and could compress profits and require more aggressive M&A beyond FY2013.

Not everyone agrees with Shope today: HPQ Can Ride �Big Data,� Says Bibb; Apple TV Set Coming in Q3.