Analyst Sees 75% Upside for Tech Turnaround Stock
Tech companies Hewlett-Packard, Cisco Systems, 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 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 and Nokia 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 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.”
—By CNBC.com's Katie Little; Follow Her on Twitter @katie_little
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Sterne Agee makes a market in shares of Cisco.