How Credit Suisse Is Playing Hewlett Packard Now

• Hewlett-Packard Company HPQ shares have lost 34 percent year-to-date, and are trading at the low end of their 52-week range of $24.30 - $41.10.
• Credit Suisse’s Kulbinder Garcha initiated coverage of the company with an Outperform rating and a price target of $19.
• Despite an expected decline in the printing market, the company may be able to offset the impact with its multi-faceted strategy, Garcha mentioned.

The overall printing market couple contract at a rate of 2 percent per annum. Analyst Kulbinder Garcha believes that HP Inc. has “multiple levers” to boost supplies revenues over the next few years, including Instant Ink, A3 and Ink Advantage.

The company’s strategy to penetrate the commercial space could help offset declining consumer printers with higher value commercial printers, thereby boosting “the health and quality of the installed base,” Garcha commented.

With IPG supplies representing more than 90 percent of operating income, “the inflection in supplies will be key to driving earnings,” the Credit Suisse report mentioned, while adding that such supplies dynamics would enable HP Inc. to be valued “as a stable, reliable annuity stream.”

The analyst estimates the company’s supplies revenue at $13.5bnfor FY16 and $13.6bn for FY17. HP Inc. is expected to return $2bn to shareholders in FY16.

Garcha said that the shares appear inexpensive because:

1. The stock is trading at a discount of about 44 percent to peers, although the dividend yield is 3.9 percent, compared to 2.8 percent of peers
2. A blue sky scenario suggests an increase in dividend payout from 28.4 percent to 40 percent
3. “We show that a reverse DCF suggests that the current share price discounts a printing business that shrinks 1.3% pa over the next fifteen years, has no terminal value and allows for no value for the PC business, which we believe is highly conservative.”