HP Analyst Report

8/19/2019 HP Analyst Report

1/11

E Q U I T Y R E S E A R C H

RBC Capital Markets, LLC

Amit Daryanani, CFA(Analyst)(415) [email protected]

Mitch Steves (Analyst)(415) [email protected]

Irvin Liu (Senior Associate)(415) [email protected]

Jeriel Ong (Senior Associate(415) 633-8559

[email protected]

Sector: IT Hardware

Sector PerformNYSE: HPQ; USD 10.82

Price Target USD 11.00

WHAT'S INSIDE

Rating/Risk Change Price Target Change

In-Depth Report Est. Change

Preview News Analysis

Scenario Analysis*

DownsideScenario

8.00

21%

CurrentPrice

10.82

PriceTarget

11.00

6%

UpsideScenario

14.00

34%

*Implied Total Returns

Key StatisticsShares O/S (MM): 1,785.0

Dividend: 0.50

Market Cap (MM): 19,3

Yield: 4.6

Avg. Daily Volume: 18,347,8

RBC EstimatesFY Oct 2014A 2015A 2016E 201

Revenue 111.4 103.4 47.6 46

Prev. 48.5 47

EPS, Adj Diluted 3.74 3.59 1.59 1.

Prev. 1.58

P/AEPS 2.9x 3.0x 6.8x 6.

Revenue Q1 Q2 Q3 Q

2015 26.8A 25.5A 25.3A 25.7

2016 12.2A 11.8E 11.7E 11.

Prev. 12.3E 12.1E 11.9E 12.

2017 11.6E 11.4E 11.4E 11.

Prev. 11.9E 11.9E 11.6E 12.

EPS, Adj Diluted

2015 0.92A 0.87A 0.88A 0.93

2016 0.36A 0.37E 0.42E 0.4

Prev. 0.34E 0.42E 0.34E 0.4

2017 0.37E 0.39E 0.43E 0.4

Prev. 0.36E 0.44E 0.35E 0.42014 and first three quarters of 2015 are historicals pending restatemeby the company and do not reflect the spin-off of HPE.All values in USD unless otherwise noted.

February 25, 2016

Hewlett-Packard Company

Headwinds Persist but Cost Containment ShouldPartially Offset Soft Macro

Our view: HPQ's Jan-qtr results ($12.2B/$0.36) were largely in line with

consensus ($12.1B/$0.36),

Key points:ALL YOU NEED TO KNOW: HPQ's Jan-qtr results were reflective of macro

challenges in both its PC and Printing markets. Specifically, HPQ's double-

digit revenue declines were due to: 1) broader PC market weakness

negatively impacting PSG volume and pricing; 2) strategic sales of printing

hardware units (shifting sales away from low-use customers toward

higher-value, high-usage customers); and 3) Supplies – installed base

erosion, channel inventory adjustments, and share losses to aftermarket.

We note that the company's FY16E EPS/FCF guidance of $1.59–1.69/

$2.3–2.6B assumes a H2:16 improvement in both PC and Supplies

revenue trajectories combined with benefits of cost actions (accelerated

restructuring activity). While the stock is trading at an attractive valuation/

dividend yield, our concern is that, in the event broader macro headwinds

persist through 2016, there could be risk to FY16E numbers. Maintaining

Sector Perform rating and $11 price target.

Quarter Review: HPQ reported Jan-qtr revenues/EPS of $12.2B/$0.36,

which was largely in line with consensus expectations of $12.1B/$0.36.

Notably, EPS was at the midpoint of management’s expectations ($0.33–

0.38). Total revenues were down -11.6% y/y. Revenue performance by

segment included the following: PSG was down -13% y/y while IPG was

also down -17% y/y. A one-time benefit from the release of deferred

revenue related to the HPE separation benefited total revenue growth by

~1–2pts. Adjusted operating margin of 7.8% was down -60bps y/y and up

+70bps q/q. HPQ used -$108M in cash from operations and had -$228M

in FCF, which is below expectations of +$300M in FCF.

BS and Cash Flow: Cash cycle days were up four days y/y to -15 days.

The company had -228M in free cash flow for the Jan-qtr. The company

believes it should generate $2.3–2.6B of FCF in FY16 ($2.9–3.2B on a

normalized basis after adjusting for $300M in cash restructuring charges

and $300M in cash separation expenses).

Guidance: HPQ maintained its FY16 EPS guidance range of $1.59–1.69,

including Apr-qtr EPS of $0.35–0.40 (Street $0.39). HPQ guided to double-

digit y/y declines in both IPG hardware and supplies for Apr-qtr. The

company lowered its FY16E FCF guide by $100M at the midpoint to $2.3–

2.6B (down from $2.4–2.7B) to reflect cash restructuring costs from the

acceleration of its restructuring plan (HPQ now expects 3,000 employees

to exit by FY16 ahead of prior FY18 target). The company still expects

to generate $2.9–3.2B of FCF on a normalized basis, after adjusting for

$300M in cash restructuring payments and $300M in separation cash

payments.

Priced as of prior trading day's market close, EST (unless otherwise noted)For Required Conflicts Disclosures, see Page 8.


2/11

Target/Upside/Downside Scenarios

Exhibit 1: Hewlett-Packard Co

300m

200m

100m

O N

2013

D J F M A M J J A S O N

2014

D J F M A M J J A S O N

2015

D J F

UPSIDE14.00

TARGET11.00

CURRENT10.82

DOWNSIDE8.00

Feb 2017

43

33

28

23

18

13

8

125 Weeks 04OCT13 - 24FEB16

HPQ Rel. S&P 500 COMPOSITE MA 40 weeks

Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target

Target price/base caseIn our base case scenario, we assume that FY16 revenue

will decline low-to-mid single digits while non-GAAP EBIT

margin will hold fairly steady on productivity gains offset by

currency headwinds. We have factored in cost savings and

share repurchases largely offsetting revenue, currency, and

separation dis-synergy headwinds. Based on a ~7x FTM P/E

multiple, the stock could trade toward $11.

Upside scenario

In our upside scenario, we assume that FY16 revenue is flat

to slightly down y/y despite the headwinds in the PC, Print

Hardware, and Supplies business units. This scenario also

assumes that HPQ is able to achieve the high end of its targetoperating margin range of 9–10% and generate $3B+ of free-

cash flow. Based on an ~9x FTM P/E multiple, the stock could

trade toward $14.

Downside scenario

In our downside scenario of $8/share, we see a high-single-

digit revenue decline in FY16 that would offset the favorable

benefits of productivity gains. We would also see non-GAAP

EPS declining by double digits. Using a FTM P/E multiple of ~5x,

we believe the stock could trade down to $8. We also think

FCF could fall below ~$2B on lower net income, less favorable

working capital metrics (cash conversion cycle above 0), and

higher-than expected separation cash outlays.

Investment summaryHP’s top and bottom lines should be pressured through

FY16: We believe HP should see challenging growth dynamics

through FY16 on foreign currency translation headwinds,

competitive industry pricing, and PC channel inventory issues.

From a shareholder return standpoint, we think the company's

relatively high dividend yield could be attractive for investors.

FCF remains a driving factor for valuation and stock

performance: Historically, the driver of HP's stock price

performance has been its FCF trends. We expect this dynamic

to remain for HPQ. For FY16, we think FCF of $2.3–2.6B will

be well below normalized levels (~$3B) after adjusting for

restructuring and separation cash payments.

Potential catalystsSupplies recovery: HPQ Supplies' quarterly revenue has

declined on a y/y basis for the last 16 quarters. The company

expects the decline to continue through FY16. We think a

moderation in decline or revenue stabilization in HPQ's higher-

margin supplies business could drive improved mix and margin

upside.

PC stabilization: A better than expected improvement in the

PC Market could positively impact HPQ's Personal Systems

revenue trajectory.

RisksGlobal Macro Downturn: A muted IT spend environment

would negatively impact revenue and margin profiles for the

company.

Competition: The risk of HP Inc. using supplies margins as a

lever to drive an aggressive pricing strategy to increase install

base could yield margin headwinds in FY16 and beyond.

Currency: ~60% of HPQ's revenue is generated outside the

United States. A depreciation of global currency relative to the

U.S. dollar could negatively impact both revenue and EPS.

Hewlett-Packard Co

IT Hardware

February 25, 2016 Amit Daryanani, CFA (415) 633-8659; [email protected] 2


3/11

Hewlett Packard Co. Earnings ReviewJan-Qtr Review: HPQ reported Jan-qtr revenues/EPS of $12.2B/$0.36, which was largely in

line with consensus expectations of $12.1B/$0.36. Notably, EPS was at the midpoint of

management’s expectations ($0.33 –0.38). Total revenues were down -11.6% y/y. Revenueperformance by segment included the following: PSG was down -13% y/y while IPG was also

down -17% y/y. A one-time benefit from the release of deferred revenue related to the HPE

separation benefited total revenue growth by ~1 –2pts. Adjusted operating margin of 7.8%

was down -60bps y/y and up +70bps q/q. HPQ used -$108M in cash from operations and had

-$228M in FCF, which is below expectations of +$300M in FCF.

Exhibit 2: HPQ Earnings Analysis ($ in millions)

Quarterly Comparison

Jan-16 Jan-15 Oct-15 RBC Estimate Y/Y Vs. RBC RBC Perspective

Net Sales $12,246 $13,858 $12,266 $12,257 -11.6% -0.1% Largely in-l ine with Street after adjusting for deferred revenue separation benefit

Cost of Goods Sold $9,961 $11,173 $9,900 $9,941 -10.8% 0.2%

% Of Sales 81.3% 80.6% 80.7% 81.1% + 70 bps

Gross Profit $2,285 $2,685 $2,366 $2,317 (14.9%) (1.4%)

Gross Margin 18.7% 19.4% 19.3% 18.9% (70 bps) (20 bps) Slightly below our estimates

Research and Development $292 $304 $282 $374 -3.9% -21.9%

% Of Sales 2.4% 2.2% 2.3% 3.1% + 20 bps (70 bps)

SG&A $1,037 $1,222 $1,212 $1,066 -15.1% -2.8% Slightly below our estimates

% Of Sales 8.5% 8.8% 9.9% 8.7% (30 bps) (20 bps)

Operating Income $916 $1,101 $814 $864 -16.8% 6.0%

Adjusted Operating Margin 7.8% 8.4% 7.1% 7.2% (60 bps) + 70 bps Margin should improve over the course of FY16E.

Interest (Income)/Expense $94 $121 $99 $188 -22.3% -49.9%

Pretax Inc./(Loss) Cont. Ops. GAAP $822 $980 $715 $677 -16.1% 21.5%

Pre-Tax Margin 6.7% 7.1% 5.8% 5.5% (40 bps) + 120 bps

Taxes $177 $215 $167 $145 -17.7% 21.7%

Tax Rate 22% 22% 23% 22% (40 bps) + 0 bps Remains stable in the low twenties

Net Income $645.0 $765.0 $548.0 $531.2 -15.7% 21.4%

After-Tax Margin 5.3% 5.5% 4.5% 4.3% (30 bps) + 90 bps

Shares - Diluted 1,785 1,861 1,821 1,813 -4.1% -1.5%

Diluted GAAP EPS $0.36 $0.42 $0.30 $0.34 -13.4% 5.8% Beat our estimate by $0.02

Source: Company reports and RBC Capital Markets estimates

GuidanceHPQ maintained its FY16 EPS guidance range of $1.59 –1.69, including Apr-qtr EPS of $0.35 –

0.40 (Street $0.39). HPQ guided to double-digit y/y declines in both IPG hardware and

supplies for Apr-qtr. The company lowered its FY16E FCF guide by $100M at the midpoint to

$2.3 –2.6B (from $2.4 –2.7B) to reflect cash restructuring costs from the acceleration of its

restructuring plan (HPQ now expects 3,000 employees to exit by FY16 ahead of prior FY18

target). The company still expects to generate $2.9 –3.2B of FCF on a normalized basis, after

adjusting for $300M in cash restructuring payments and $300M in separation cash

payments.

Hewlett-Packard Co

IT Hardware



4/11

Segment Review

Personal Systems Group (~60% of sales)HPQ reported PSG revenues of $7.5B, -13% y/y, with operating margin of 3.1%, which was

down -60bps q/q and down -40bps y/y. Commerical revenue declined -11% y/y and

consumer was down -16% y/y. Revenues from Notebooks were down -11.0% y/y while

desktop revenues were down -14.3% y/y; units of notebooks were down -11% y/y and

desktop units fell -13% y/y. For the Apr-qtr, we see revenues decreasing -8% y/y on

continued softness in the PC market offset by a somewhat easier y/y comparison. Over time,

we see room for margin improvement via benefits from cost reductions, supply chain

efficiencies, and the introduction of new products.

Exhibit 2: PSG Detail ($ in millions)

Segment Sales Jan-16 Jan-15 Oct-15 Y/Y % Q/Q %

Notebooks $4,205 $4,724 $4,384 -11% -4%

Desktops $2,527 $2,949 $2,530 -14% -0%

Workstations $444 $526 $472 -16% -6%

Other $291 $363 $308 -20% -6%

Personal Sy stems G roup $7,467 $8,562 $7,694 -13% -3%

Segment Operating Margin 3.1% 3.5% 3.7% -40 bp s -60 bp s2%

3%

4%

5%

6%

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

$10,000

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Personal Systems Group PSG Margins


Imaging and Printing Group (~40% of sales)IPG posted revenues of $4.6B, -17% y/y and -7% q/q. Supplies revenue fell -13.9% y/y and

-4.3% q/q. Management indicated that the segment lost a three points of total share y/y in

calendar Q4 due to strategic selling and pricing discipline but gained one point in share in the

value multi-function laser printer market. Commercial hardware units declined -15% y/y

while consumer hardware units were down -23% y/y. Segment operating margins of 17.0%

was up +10bps q/q fell -180 bps y/y.

Exhibit 3: Imaging and Printing Detail ($ in millions)

Segment Sales Jan-16 Jan-15 Oct-15 Y/Y % Q/Q %

Co mme rci a l H ard wa re $1,219 $ 1,394 $ 1,366 -13% -11%Consumer Hardware $322 $601 $360 -46% -11%

Supplies $3,101 $3,601 $3,239 -14% -4%

Other $4,642 $5,596 $4,965 -17% -7%

Segment Operating Margin 17.0% 18.8% 16.9% - 180 bps +10 bps

10%

12%

14%

16%

18%

20%

$4,500

$4,750

$5,000

$5,250

$5,500

$5,750

$6,000

$6,250

$6,500

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Printing Gr oup IPG Margins


Personal Systems GroupRevenue declined -13% y/y

Imaging and Printing fell

-17% y/y

Hewlett-Packard Co

IT Hardware



5/11

Balance Sheet and Cash FlowCash cycle days were up four days y/y to -15 days. The company had -228M in free cash flow

for the Jan-qtr. It believes it should generate $2.3 –2.6B of FCF in FY16 ($2.9 –3.2B on a

normalized basis after adjusting for $300M in cash restructuring charges and $300M in cashseparation expenses).

Estimate ChangesOur FY16 revenue/EPS estimates are $47.6B/$1.59, including our Apr-qtr forecast of

$11.8B/$0.37. For FY17, we are modeling $46.2B/$1.64.

Hewlett-Packard Co

IT Hardware



6/11

ValuationOur price target of $11 is based on a FTM P/E multiple of ~7x. Our target multiple reflects a

significant discount to the large cap technology company peer group average due to HPQ’s


7/11

Amit Daryanani, CFA (415) 633-8659; [email protected]

Two Embarcadero Center, Suite 2350, San Francisco, CA 94111 Hewlett-Packard (NYSE: HPQ)Income Statement ($M) Jan-16 Apr-16E Jul-16E Oct-16E Jan-17E Apr-17E Jul-17E Oct-17E FY16E FY17E CY16E CY17E

Net Sales $12,246.0 $11,756.7 $11,664.1 $11,913.6 $11,625.0 $11,391.6 $11,406.1 $11,746.9 $47,580 $46,170 $46,959 $46,011

Q/Q Change -0.2% -4.0% -0.8% 2.1% -2.4% -2.0% 0.1% 3.0% NA NA NA NA

Y/Y Change -11.6% -9.4% -5.7% -2.9% -5.1% -3.1% -2.2% -1.4% -7.5% -3.0% -5.8% -2.0%

Cost of Goods Sold 9,961.0 9 ,522.9 9,401.3 9,566.7 9,432.6 9,193.0 9,170.5 9,409.2 38,451.8 3 7,205.4 37,923.4 37,030.6

% Of Sales 81.3% 81.0% 80.6% 80.3% 81.1% 80.7% 80.4% 80.1% 80.8% 80.6% 80.8% 80.5%

Gross Profit 2,285.0 2,233.8 2,262.8 2,347.0 2,192.4 2,198.6 2,235.6 2,337.6 9,128.6 8,964.2 9,036.0 8,980.1 Gross Margin 18.7% 19.0% 19.4% 19.7% 18.9% 19.3% 19.6% 19.9% 19.2% 19.4% 19.2% 19.5%

Q/Q Change -3.4% -2.2% 1.3% 3.7% -6.6% 0.3% 1.7% 4.6% NA NA NA NA

Y/Y Change -14.9% -16.8% -3.2% -0.8% -4.1% -1.6% -1.2% -0.4% -9.4% -1.8% -6.6% -0.6%

Research and Development 292.0 2 82.2 279.9 285.9 279.0 273.4 285.2 281.9 1,140.0 1,119.5 1,127.0 1 ,115.7

% Of Sales 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.5% 2.4% 2.4% 2.4% 2.4% 2.4%

Q/Q Change 3.5% -3.4% -0.8% 2.1% -2.4% -2.0% 4.3% -1.1% NA NA NA NA

Y/Y Change -3.9% -27.5% -24.6% 1.4% -4.5% -3.1% 1.9% -1.4% -15.3% -1.8% -15.5% -1.0%

SG&A 1,037.0 9 87.6 921.5 953.1 972.8 945.5 889.7 928.0 3,899.1 3,736.0 3,834.9 3 ,711.2

% Of Sales 8.5% 8.4% 7.9% 8.0% 8.4% 8.3% 7.8% 7.9% 8.2% 8.1% 8.2% 8.1%

Q/Q Change -14.4% -4.8% -6.7% 3.4% 2.1% -2.8% -5.9% 4.3% NA NA NA NA

Y/Y Change -15.1% -19.8% -19.0% -21.4% -6.2% -4.3% -3.4% -2.6% -18.8% -4.2% -17.0% - 3.2%

Amortization of Intangibles 40.0 35.3 29.2 29.8 29.1 28.5 28.5 29.4 134.2 115.4 123.3 115.0

% Of Sales 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

Income (Loss) From Operations (Non-GAAP) 916.0 928.8 1,032.3 1,078.2 911.5 951.2 1,032.3 1,098.3 3,955.2 3,993.3 3,950.8 4,038.2

% Of Sales 7.5% 7.9% 8.8% 9.1% 7.8% 8.4% 9.1% 9.3% 8.3% 8.6% 8.4% 8.8%

Adjusted Operating Margin 7.8% 8.2% 9.1% 9.3% 8.1% 8.6% 9.3% 9.6% 8.6% 8.9% 8.7% 9.0%

Incr. Margin 11.5% 9.0% -32.2% -75.0% 0.7% -6.1% 0.0% -12.1% 8.6% 8.9% 8.6% 8.8%

Interest (Income)/Expense 94.0 90.0 85.0 80.0 80.0 80.0 80.0 80.0 349.0 320.0 335.0 320.0

Misc. (Inc.)/Loss 0 0 0 0 0 0 0 0 0 0 0 0

Pretax Inc./(Loss) Cont. Ops. GAAP 822.0 838.8 947.3 998.2 831.5 871.2 952.3 1,018.3 3,606.2 3,673.3 3,615.8 3,718.2

Pre-Tax Margin 6.7% 7.1% 8.1% 8.4% 7.2% 7.6% 8.3% 8.7% 7.6% 8.0% 7.7% 8.1%

Prov. For Tax 177.0 1 80.3 203.7 214.6 178.8 187.3 204.7 218.9 775.6 789.8 777.4 784.4

Tax Rate 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 21%

Implied Non-GAAP Taxes $186 $188 $210 $221 $185 $193 $211 $225 $804 $815 $804 $809

Implied Non-GAAP Tax Rate 21.5% 21.5% 21.5% 21.5% 21.5% 21.5% 21.5% 21.5% 21.5% 21.5% 21.5% 21.1%

Income (Loss) Cont. Ops. $645 $658 $744 $784 $653 $684 $748 $799 $2,831 $2,884 $2,838 $2,919

Extra-Ordinary Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cum. Effect Of Acctg. Change 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit $645 $658 $744 $784 $653 $684 $748 $799 $2,831 $2,884 $2,838 $2,919

Preferred Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit Avail. Common 645.0 658.4 743.6 783.6 652.7 683.9 747.5 799.4 2,830.6 2,883.5 2,838.4 2,918.8

After-Tax Margin 5.3% 5.6% 6.4% 6.6% 5.6% 6.0% 6.6% 6.8% 5.9% 6.2% 6.0% 6.3%

Shares - Basic 1,776 1,771 1,766 1,761 1,756 1,751 1,746 1,741 1,769 1,749 1,764 1,744

Shares - Diluted 1,785 1,780 1,775 1,770 1,765 1,760 1,755 1,750 1,778 1,758 1,773 1,753

Pro-Forma EPS (Cont. Ops) $0.36 $0.37 $0.42 $0.44 $0.37 $0.39 $0.43 $0.46 $1.59 $1.64 $1.60 $1.62

Source: Company Reports and RBC Capital Markets Estimates.

Hewlett-Packard C

IT Hardwar

February 25, 2016 Amit Daryanani, CFA (415) 633-8659; [email protected]


8/11

Required disclosures

Conflicts disclosures

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including

total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated

by investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,

this report. To access current conflicts disclosures, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/

DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza,

29th Floor, South Tower, Toronto, Ontario M5J 2W7.

A member company of RBC Capital Markets or one of its affiliates managed or co-managed a public offering of securities for

Hewlett-Packard Co in the past 12 months.

A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from

Hewlett-Packard Co in the past 12 months.

RBC Capital Markets, LLC makes a market in the securities of Hewlett-Packard Co.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than

investment banking services from Hewlett-Packard Co during the past 12 months. During this time, a member company of RBC

Capital Markets or one of its affiliates provided non-securities services to Hewlett-Packard Co.

RBC Capital Markets is currently providing Hewlett-Packard Co with non-securities services.

RBC Capital Markets has provided Hewlett-Packard Co with investment banking services in the past 12 months.

RBC Capital Markets has provided Hewlett-Packard Co with non-securities services in the past 12 months.

Explanation of RBC Capital Markets Equity rating systemAn analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned

to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to

the analyst's sector average. Although RBC Capital Markets' ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), and

Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because

our ratings are determined on a relative basis.

Ratings

Top Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 months

with a favorable risk-reward ratio.

Outperform (O): Expected to materially outperform sector average over 12 months.

Sector Perform (SP): Returns expected to be in line with sector average over 12 months.

Underperform (U): Returns expected to be materially below sector average over 12 months.

Risk RatingAs of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflects

a security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited

operating history that result in a higher expectation of financial and/or stock price volatility.

Hewlett-Packard Co

IT Hardware


https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1


9/11

Distribution of ratings

For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories

- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/

Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,the meanings are not the same because our ratings are determined on a relative basis (as described below).

Distribution of ratings

RBC Capital Markets, Equity Research

As of 31-Dec-2015

Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [Top Pick & Outperform] 933 52.59 271 29.05

HOLD [Sector Perform] 727 40.98 102 14.03

SELL [Underperform] 114 6.43 8 7.02

References to a Recommended List in the recommendation history chart may include one or more recommended lists or model

portfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists include

the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Large Cap (RL 7), the Guided Portfolio: Dividend Growth (RL 8),

the Guided Portfolio: Midcap 111 (RL 9), the Guided Portfolio: ADR (RL 10), and the Guided Portfolio: Global Equity (U.S.) (RL 11).

RBC Capital Markets recommended lists include the Strategy Focus List and the Fundamental Equity Weightings (FEW) portfolios.

The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off' means the date

a security was removed from a Recommended List.

Equity valuation and risks

For valuation methods used to determine, and risks that may impede achievement of, price targets for covered companies, please

see the most recent company-specific research report at https://www.rbcinsight.com or send a request to RBC Capital Markets

Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.

Conflicts policy

RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.

To access our current policy, clients should refer to

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or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South

Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

Dissemination of research and short-term trade ideasRBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having

regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary website

to ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional

distribution may be done by the sales personnel via email, fax, or other electronic means, or regular mail. Clients may also

receive our research via third party vendors. RBC Capital Markets also provides eligible clients with access to SPARC on the Firms

proprietary INSIGHT website, via email and via third-party vendors. SPARC contains market color and commentary regarding

subject companies on which the Firm currently provides equity research coverage. Research Analysts may, from time to time,

include short-term trade ideas in research reports and / or in SPARC. A short-term trade idea offers a short-term view on

how a security may trade, based on market and trading events, and the resulting trading opportunity that may be available. A

short-term trade idea may differ from the price targets and recommendations in our published research reports reflecting the

research analyst's views of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons,

methodologies and/or other factors. Thus, it is possible that a subject company's common equity that is considered a long-term'Sector Perform' or even an 'Underperform' might present a short-term buying opportunity as a result of temporary selling pressure

in the market; conversely, a subject company's common equity rated a long-term 'Outperform' could be considered susceptible

to a short-term downward price correction. Short-term trade ideas are not ratings, nor are they part of any ratings system, and

the firm generally does not intend, nor undertakes any obligation, to maintain or update short-term trade ideas. Short-term trade

ideas may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, and

investors should make their own independent decisions regarding any securities or strategies discussed herein. Please contact

your investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research.

Analyst certification

All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of

the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or

indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial Services

LLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied

warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties

of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing,

in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special,

punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Disclaimer

RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBC

Capital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, Sydney

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opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and

are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment

advice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent

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Additional information is available on request.

To U.S. Residents:

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To Canadian Residents:

This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution in

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This publication is distributed in Hong Kong by RBC Capital Markets (Hong Kong) Limited and Royal Bank of Canada, Hong Kong Branch (both entities which are

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This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch, a registered entity granted offshore bank licence by the Monetary

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Copyright © RBC Capital Markets, LLC 2016 - Member SIPC

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