H-P Shares Go From Dog to Diamond

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In case you missed it Hewlett-Packard continues to be the Dow’s golden stock of 2013.

Even as the company struggles under a multiyear transformation, the stock is already up 60% this year, by far the biggest gainer among the 30 stocks in the Dow Jones Industrial Average. The next closest riser is Travelers, up 15% in 2013.

Analysts at Morgan Stanley still see more upside for H-P shares.

The firm said H-P CEO Meg Whitman’s emphasis on free cash flow could create higher profits compared to what Wall Street analysts currently expect. Morgan Stanley boosted its rating on H-P to overweight from equal weight and lifted its price target to $27.

Shares recently rose 3.2% to $22.89, leading the Dow back into positive territory this afternoon.

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Morgan Stanley said cuts to capital spending should help H-P’s free cash flow reach $3.45 a share this�fiscal year, almost $1 above management’s guidance and closer to core�earnings. The firm also cited improving employee spirits as another bullish catalyst for the stock.

“We see early signs that employee�morale is improving with the higher stock price and�leaner infrastructure, which sets up for better execution�in businesses like PCs and services where margins are�currently at trough levels,” Morgan Stanley says.

Last month, H-P reported quarterly results that�weren�t a total disaster, which apparently was all the stock price needed to stoke a big rally. The company didn�t announce any write-downs, big job cuts or strategic reversals that could�ve thrown analysts and investors for a loop, which provided a glimmer of hope that the worst in H-P�s long and tumultuous turnaround might be over.

At that time, CEO Meg Whitman attempted to downplay any brewing optimism. She said her company isn�t ready to raise guidance despite stronger-than-expected results.

Judging by the stock price, the market appears to be front-running her next move.

To be sure, H-P shares still have a long way to go to recover from recent levels over the last few years. The stock is down about 7% from a year ago, and is off more than 55% from three years ago.

But for now, Morgan Stanley has found reasons to think the recent rebound can continue.

“H-P’s valuation recently expanded from a trough of 3x to nearly 6x free cash flow,” Morgan Stanley said, “but we see further upside to at least 7x.”

–Drew Fitzgerald contributed to this report.

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