Dave Novosel of fixed income ratings firm Gimme Credit this morning reiterates a Sell recommendation on Hewlett-Packard (HPQ) bonds, after reminding investors of the “long and winding road” back to recovery that the company faces under recently installed CEO Meg Whitman.
Novosel notes that fiscal Q1 revenue’s decline of 7%, year over year, was the worst such drop “since the thick of the financial crisis.”
Novosel notes that with Whitman’s commitment to beefing up capabilities in services, the 400 basis point decline in the unit’s operating margin will likely see further deterioration from spending.
Novosel expects revenue this quarter will fall more than 5%, which is consistent with the 5.4% decline, year over year, the Street is modeling. He sees another 2.7% decline in the July quarter, a bit worse than the 2.6% consensus.
Novosel sees HP making free cash flow of $6.5 billion this fiscal year ending in October, of which $2 billion may be spent on repurchases. With another $1 billion, perhaps, to be spent on small acquisitions, it will “take a few years” for Whitman to attend to fixing the balance sheet. While the company’s debt-to-Ebitda, at 2 times, is hardly egregious by most standards, it is more than for most tech peers, who generally are cash-rich (HP has $22.3 billion of net debt.)
Concludes Novosel, “Given our outlook for weaker revenue and eroding margins, we do not foresee much improvement in the credit profile.”
HP shares today are up 22 cents, almost 1%, at $25.48.