HP's Stock Rally Is 'Running Out of Steam'

NEW YORK ( TheStreet) -- Investors should be careful about owning HP ( HPQ) shares, warns Brian White, an analyst at Topeka Capital Markets.

"The greater than 50% rally in HP's stock over the past seven weeks has been impressive and driven by a plethora of factors, but none that we believe are based in reality," he wrote in a note released Friday. "As such, we believe the stock is close to running out of steam and we remain sellers at these levels."

The beleaguered tech giant has been thrust into the spotlight recently. HP's shares spiked on Wednesday following a news report that potential purchasers are evaluating the company's Autonomy and EDS units.

A spokesman for HP told TheStreet that the company doesn't comment on speculation.

There have been plenty of rumors, though, about HP carving off parts of its business. In a recent regulatory filing with the Securities and Exchange Commission, HP said it will "continue to evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives."

White, however, believes that the buyout talk swirling around rival Dell ( DELL) has fuelled HP M&A chatter, lifting its shares.

"Given the current legal issues surrounding Autonomy after HP called out improprieties at the company, we can't imagine that any rational buyer would pay much for this business," White wrote. "While services have been challenged in recent quarters, selling off EDS seems a bit extreme and unlikely to happen in the near term, especially when this business makes sense with HP's enterprise portfolio. We don't expect a major, near-term transformation at HP."

Also, this week's weak guidance from tech bellwether Intel ( INTC) hardly bodes well for HP, highlighting pressure in the PC market.

There had been hopes that Microsoft's ( MSFT) Windows 8 launch would boost the PC business, although that is yet to materialize, according to White. "Intel's call last night provided a subtle reminder that demand is not off to the races just yet," he wrote. The analyst also notes that HP's restructuring challenges and "stretched balance sheet" make it more vulnerable to competition from IT heavyweights such as IBM ( IBM) and Cisco ( CSCO), as well as EMC ( EMC) and Oracle ( ORCL).

Clearly, HP CEO Meg Whitman has a lot on her plate. Last year she laid out her turnaround plan for the No. 1 PC maker, which has seen its shares slump 37% over the past 12 months. HP says it's on track to complete its restructuring by the end of fiscal 2014. By 2016, Whitman expects to see the company's revenue growing in line with GDP and operating profit increasing faster than revenue.

HP's research and development (R&D) also came under scrutiny this week, with Moody's noting that it lags rivals such as IBM, Dell, Cisco, EMC, Oracle Lenovo and Lexmark ( LXK).

"We expect Hewlett-Packard's revenue growth to continue lagging its broad peer group due to the company's relative underinvestment in R&D," Moody's analyst Richard Lane wrote in a note Thursday. "We estimate that HP invested approximately $1.1 billion less in R&D than a competitor composite during the last year, and $5.4 billion since 2006."

HP shares, which have climbed almost 19% since the start of 2013, dipped 1% to $16.94 in Friday trading.

-- Written by James Rogers in New York.

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