Three Moves HP's Apotheker Should Consider

Credit Suisse has outlined three strategies Leo Apotheker-- the new Chief Executive of Hewlett-Packard (NYSE: HPQ) -- should consider:

* Re-invigorate the software segment, which contributes only 5 percent to profit and is a tenth the size of IBM's (NSYE: IBM) software business, through hiring and M&A. Here the company's projected cumulative free cash flow of $65 billion over the next five years offers flexibility.

* Drive an all-out price war to accelerate share gains in networking at Cisco's (NASDAQ: CSCO) expense, since segment margins, though lower than Cisco's, are materially accretive to HP's 24 percent gross margins.

* Consider exiting the PC business in light of its commodity status and limited strategic benefits

Credit Suisse initiated coverage of HP with an outperform rating and $60 price target, saying that HP's transition from a hardware-centric business model continues, with services, storage, and networking rising in the mix and driving group margins higher.

This should enable the company to easily deliver $6 of EPS in CY12, and hence we see compelling upside potential of 45 percent, analyst K. Garcha wrote in a note to clients.

Meanwhile, despite the recent hiccup, the analyst sees services growth ahead.

Our proprietary IT services demand forecast suggests that when compared to GDP growth, hardware/software attach or to corporate profits, global IT services are being under-consumed globally, providing a backdrop for accelerating revenue growth, Garcha said.

The analyst also sees HP gaining share given positive exposure to faster-growing emerging markets and a robust end to end offering.

Finally, Garcha believes the current cost saving plans will drive segment margins to 15.5 percent in fiscal 2011 and 16 percent in fiscal 2012.

Shares of HP were up 3 percent at $41.38 on the NYSE.