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Wall Street talks up HP

After months of raising questions about the merger between Hewlett-Packard and Compaq Computer, analysts are getting back on the bandwagon and talking up shares.

After months of raising questions about the merger between Hewlett-Packard and Compaq Computer, Wall Street analysts are getting back on the bandwagon and talking up shares.

Shares of HP, which unveiled its product plans Tuesday, gained $1.59, or 8.64 percent, to $20 Wednesday after Prudential Securities upgraded the stock from a "hold" to a "buy." SoundView Technology also started coverage of HP with a "buy" rating.

The upgrades come as HP is set to report its fiscal second quarter without Compaq on May 14. The company is expected to deliver a solid quarter and follow up with its financial outlook for upcoming quarters and fiscal 2003 in June.

Since April 26, HP shares have surged about 17 percent, as Wall Street analysts have been formulating their estimates as the company integrates with Compaq. In a bevy of research notes, Wall Street analysts said HP's projections of 4.9 percent revenue loss for the combined company and $2.5 billion in cost savings are achievable targets.

Those targets--and whether HP can hit them--were a central issue in the lawsuit filed by former HP board member Walter Hewlett. HP won that case and has been in Wall Street's good graces for the most part since then.

The common theme among analysts Wednesday was that HP shares are worth at least $22 based on conservative revenue projections. The biggest disconnect seems to be between HP's market capitalization ($35.4 billion) and its projected revenue in 2003 (about $75 billion).

In a research note, Prudential analyst Kimberly Alexy said she expected the merger to hurt HP earnings, but she doubts earnings will fall below $1.20 per share in fiscal 2003. Her official earnings target is $1.28 per share for fiscal 2003.

"We believe HP will deliver upon its previously stated goals for modest quarter-over-quarter revenue decline, and we remain comfortable with our estimates," she said.

Alexy also said that HP's channel inventories look clean and that a $1 billion charge will buy the company a "fair amount" of financial flexibility for the next two quarters.

Alexy set a price target of $24 a share for HP. HP's "product announcements were generally consistent with our expectations and will mark the start of HP's ability to move forward with its merged product roadmap, allowing both employees and customers to finally move forward after nearly nine months of uncertainty," Alexy said.

SoundView analyst Mark Specker agreed, adding in a research report Wednesday a price target of $22.50 on shares. He also set a fiscal 2003 earnings estimate of $1.19 per share with revenue of $75.25 billion.

Merrill Lynch analyst Steven Milunovich also set his fiscal 2003 targets for HP, projecting earnings of $1.35 a share assuming a 7 percent revenue loss for the combined companies.

Although his target assumes revenue loss related to the Compaq merger will be worse than expected, he still thinks HP is worth $28 a share. He arrives at that conclusion by adding up the various parts of HP and what they are worth.

Even though analysts are upbeat about HP's stock price now, they still hold reservations about HP's ability to integrate Compaq.

Walter Winnitski, an analyst at First Albany, maintained a long-term neutral rating on HP, adding that the company's shares may gain, but it still faces weak information technology spending and integration issues.

"The sustainability of any rally is unclear as we are not convinced that the merger won't prove challenging in other ways," he said.

Even in upgrading HP, Alexy agreed. "We remain skeptical about HP's ability to leverage the Compaq assets," she said.