HP Valueline Outlook

Hewlett-Packard is making a big acquisition. In May, the information technology giant announced that it had agreed to acquire services provider Electronic Data Systems for $25 a share in cash, a total of $13.9 billion. That represents a premium of 28% over the EDS price before the news of the acquisition broke. The deal is subject to the usual regulatory and
shareholder approvals, and is expected to close in the second half of 2008.
The deal would make Hewlett a more formidable competitor in the services field. The acquisition will more than double the size of H-P’s services business, and move it into second place in the field, behind IBM. Importantly, there is little overlap between the two companies’ customer bases. H-P will gain better access to large corporate accounts, which will give it an avenue to increase sales of hardware to EDS’ corporate clients. On a less positive note, EDS’ net margins are relatively narrow, just about half those of Hewlett. However, H-P expects to be able to achieve significant cost savings from reduced overhead, efficiencies of scale, and automating the delivery of services, as well as likely moving additional operations to lower-cost countries, such as India. We won’t modify our projections until the deal is finalized, but Hewlett expects the acquisition to be accretive to earnings in fiscal 2009 (begins November 1, 2008) on a non-GAAP basis, and in fiscal 2010 on a GAAP basis.
Meanwhile, H-P’s diversity is helping to keep operations on an even keel. The soft economy in the United States has slowed the company’s domestic growth,
but over 70% of revenues in the second quarter were from outside the U.S., and it is expanding rapidly in emerging markets. Too, it has a broad customer base, and less exposure than many of it peers to the struggling financial segment. What’s more, the company continues to cut costs. It is consolidating data centers and applications, and trimming overhead. All told, we think that earnings will advance at a good annual pace over our 3- to 5-year investment horizon.
H-P shares have little appeal. They are ranked to move with the year-ahead market, and have about average appreciation potential for the haul to 2011-2013.
George A. Niemond July 11, 2008


2011-13 PROJECTIONS
-------------------------------------------------Ann’l Total
-------------------------Price------ Gain------- Return
High --------------------95-------- (+115%)----- 22%
Low-------------------- 70 --------(+60%) ------13%