Household name companies Tesla Motors Inc (NASDAQ:TSLA) and HP Inc (NYSE:HPQ) have been in the news regarding recent transactions. Below analysts discuss Tesla’s proposal to acquire SolarCity and what HP intends to do with the gains it received from its most recent sale to OpenText.
Tesla Motors Inc
Following Tesla’s offer to acquire SolarCity, analyst Joseph Spak of RBC Capital explains his several concerns regarding the proposed deal, ultimately remaining cautious on Tesla.
Earlier this week Tesla offered to acquire SolarCity in an all-stock transaction at a 21-30% premium, which would value the company at $2.6-$2.8 billion. The deal is pending on an approval from SolarCity’s board and both companies’ shareholders. Spak doesn’t believe the acquisition approval will be well received by Tesla’s shareholders.
Tesla believes that it will be able to have “substantial product, service and operational synergies” by acquiring SolarCity. Tesla intends to use its customer base, design, engineering skills, and manufacturing experiences to help further SolarCity’s sales and technology. Additionally, using SolarCity’s wide network of sales and means of distribution, Tesla wants to “install a char charge, solar panels, and storage all at once and more seamlessly.” While Tesla feels that its motives behind this acquisition will help further its business, Spak thinks management needs to do a better job persuading the market.
Spak continues to state several concerns he has regarding this deal. He is unsure as to why Tesla feels the need to own SolarCity as opposed to working out a partnership agreement. Additionally, he is curious about the sustainability of SolarCity and the financial constraints this puts on Tesla.
Spark maintains his Sector Perform rating with a target price of $242, marking a 23% increase from current levels.
According to TipRanks, out of the 21 analysts who have rated the company in the past 3 months, 47% gave a Buy rating, 24% gave a Hold rating and 29% gave a Sell rating. The average 12-month price target for the stock is $271.89, marking a 38.25% upside from current levels.
Analyst James Kisner of Jefferies discusses HP’s plans to use its gains from sales after selling the remainder of its Marketing Optimization software assets to OpenText Inc. HP announced the primary usage of the gains will reduce “Printing Supplies channel inventory near-term and a change in [its] Supplies sales strategy longer-term.”
HP has noticed promotional pricing is not as successful as it used to be and has thus began a new “every day low price” strategy. It also plans on increasing its marketing efforts to “drive perceived value with end users.” Furthermore, HP is “changing its channel compensation model to one that includes both sell-in and sell-through volumes.”
HP expects the payback period from these initiatives to be three years for two reasons. First, the company expected to see a larger market share in the aftermarket HP-branded supplies. Second, reduced promotional activity will increase profits. Expectations show supplies revenue to be “marginally better” in 2017 before jumping more significantly in 2018. Consequently, HP raised its third quarter EPS expectations from $.0385 to $.0445, which reflects the gain on its sale to OpenText.
Kisner believes in HP trying to move away from aggressive promotional activity because he explains it “trains customers to only buy products when they are on sale and dilutes brand equity.” Kisner hopes that HP will experience less volatility due to quarter-to-quarter changes in channel inventory.
Kisner maintains his Buy holding on HP with a price target of $14.50, marking a 13% increase from current levels. He believes the shares will go up as the company reaches its FCF targets and investors gain confidence with improvements in PCs and Supplies.
According to TipRanks, out of the 15 analysts who have rated the company in the past 3 months, 47% gave a Buy rating and 53% gave a Hold rating. The average 12-month price target for the stock is $14.64, marking a 16.10% upside from current levels.