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Why Goldman downgraded Apple, Hewlett-Packard

Hewlett-Packard’s Belgian headquarters in Diegem, near Brussels. HP CEO Meg Whitman wants the company to remain a one-stop shop, where corporations can buy anything from a laptop to a data centre.


Inside the Market's roundup of some of today's key analyst actions

Hewlett-Packard Co. shares made a remarkable comeback in the first quarter of this year after being left for dead in 2012, gaining more than 68 per cent when including dividends. That made it the third best performer in the S&P 500 index.

Goldman Sachs thinks the rally has gone on for too long and that investors may be overestimating the computer maker's chances of a successful turnaround. In an action that sparked a sharp fall in Hewlett-Packard's share price today, Goldman downgraded the stock to "sell" from "neutral."

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The investment bank notes that Hewlett-Packard's central problems – declining PC and printing businesses – haven't gone away. Meanwhile, it's struggling with intense competition in its servers and storage hardware division.

The Street has become optimistic of late, with consensus estimates for revenue and earnings above that of Hewlett's own guidance. But the "consensus is attributing an unreasonably high probability to the turnaround's success and incorrectly assuming fundamentals have already bottomed," Goldman analyst Bill Shope contended in a research note. "In contrast, we believe earnings per share expectations could face downward revisions in coming quarters."

Mr. Shope also cut his industry estimates for personal computers this year, expecting PC unit shipments to fall 3.8 per cent this year. He believes that "end demand continues to weaken and data points continue to suggest a more difficult near-term environment."

Shares in Hewlett-Packard were down more than 5 per cent in the final hour of trading.

Target: Mr. Shope maintained a $16 (U.S.) price target. The average analyst target is $18.50, according to Bloomberg data.


Mr. Shope of Goldman Sachs is also feeling less upbeat about Apple Inc. these days, concerned that the iPhone maker could miss analysts' expectations for both its March and June quarters. He downgraded the stock to a plain old "buy" from "conviction buy" – its highest rating.

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Mr. Shope noted that the most recent products from Apple did not drive the kind of market share and new user growth as prior launches had. Meanwhile, there continues to be a lot of uncertainty related to the timing and impact of Apple's upcoming products.

"Until this uncertainty is resolved, the stock's upside potential should be more limited than we previously anticipated," he said.

But he also thinks downside is limited, too, especially given his belief that the company will soon boost its dividend or make share repurchases thanks to its huge cash reserves.

Target: Mr. Shope cut his price target to $575 from $660 (U.S.). The average target on the Street is $598.71.


Constellation Software Inc. stock has risen 39 per cent over the past year and is now trading in line with its peers, said RBC Capital Markets analyst Paul Treiber.

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The company's "pace of acquisitions has exceeded expectations, raising visibility to growth," he said. "Management's disciplined approach for investing cash flows has helped yield 28 per cent average return on invested capital. However, discipline also constrains growth. We believe there is limited visibility that Constellation will continue to materially exceed this goal."

Target: Mr. Treiber lowered his rating on the stock to "outperform" from "top pick," citing its recent price appreciation. He raised his price target to $150 from $140. The average Street target is $134.33.


Secure Energy Services Inc.'s acquisition of Frontline Integrated Services Ltd. will add greatly to shareholder value, said Raymond James analyst Andrew Bradford.

"Frontline as an entity has been in business for less than two years, yet has managed to generate $27-million revenue and $4.8-million earnings before interest, taxes, depreciation and amortization on a trailing 12-month basis," he wrote in a research note.

"We think it's reasonable to think that EBITDA will grow again over the next 12 months as a function of (a) its naturally growing run-rate; (b) greater access to growth capital through the auspices of Secure's balance sheet; and (c) the financial capability to bid on larger jobs. Given their background, we strongly suspect that Frontline's management is capable of executing much larger projects than its balance sheet has allowed to this point."

Target: Mr. Bradford raised his price target from $11.25 to $14 and rates Secure's shares "outperform." The average Street target is $13.75.


KP Tissue Inc. faces stable demand and generates attractive, sustainable margins from its strong brand portfolio, said CIBC World Markets analyst Mark Petrie.

Canada's leading tissue company does about 70 per cent of its business in Canada, but the U.S. offers the most material growth opportunities, as KP's new plant in Memphis could increase earnings by 50 per cent, Mr. Petrie said.

"The most significant risks to KPT margins are spikes in input costs and growing industry capacity. The outlook for costs is largely stable, and a blip in pulp will be managed by adjusting promotions. Pricing in the U.S. has been stable, though our forecasts reflect some impact from the new capacity," he said. "Though 2014 gives a much better picture of the earnings power at KPT, there are still further opportunities as the U.S. business grows."

Target: Mr. Petrie rates the stock "sector outperformer" and has a $22 price target. The average Street target is $21.70.


For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @ eyeonequities

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Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

Deputy head of Audience

Sonali Verma is deputy head of audience at the Globe and Mail. She is a business journalist with more than 20 years of experience, mainly in digital media.She was previously the Globe and Mail’s senior editor in charge of audience engagement, overseeing its homepages as well as social media operations. More


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