Morgan Stanley 'Holding Steady' At HP

In a report published Friday, Morgan Stanley analysts maintained an Overweight rating on Hewlett-Packard Company HPQ, with a price target of $42.

The F2Q results underlined the fact that the company has the ability to "deliver on guidance," despite headwinds. Hewlett-Packard's constant currency revenue growth stabilized at -2 percent y/y, which was better than feared.

In the report Morgan Stanley noted, "We note that despite channel inventory adjustments in the PC market that resulted in 7% unit decline in 1Q, HP grew its April quarter PC units 2% Y/Y driven by share gains and revenue came in flat in constant currency despite increasingly difficult Y/Y comparisons. We believe share gains will continue, offsetting broader softness in PCs this year."

In servers, the company's robust product portfolio seems to be the driver of revenue share gains and operating margin expansion, since this segment has a better profitability profile than PCs.

The analysts believe that the company is back on track to generating free cash flow of around $6B in FY16, up from $3.5-$4B this year. The EPS estimates for 2015 and 2016 have been raised from $3.54 to $3.60 and from $3.74 to $3.79, respectively.

The analysts expect the recently announced split to unlock value. The reasons cited were:

• HP Inc. turns into a yield vehicle and therefore re-rates toward peers with significant yield
• Services margin expansion in Enterprise provides further evidence of a successful turnaround