Credit Suisse Lowers Hewlett-Packard Estimates

• Shares of both HP Inc HPQ and Hewlett Packard Enterprise Co HPE have been under pressure in the last 5 trading days, and are down 4 percent and 16 percent, respectively, since November 19.
• Credit Suisse’s Kulbinder Garcha maintained an Outperform rating on HP Inc and a Neutral rating on Hewlett Packard Enterprise, with the price targets for both companies at $19.
• At the consolidated level, the companies delivered softer-than-expected results, Garcha said.

Analyst Kulbinder Garcha wrote, “At the consolidated level, the results were weaker than expected.” Hewlett Packard’s EPS came in at $0.93, below the consensus estimate of $0.98.

HP Inc: Weakness In PC And Printing

HP Inc faced weakness in PC and Printing, and responded by accelerating productivity and efficiency. IPG revenues stood at $4.97bn, representing a decline of 13.5 percent y/y and 2.8 percent q/q. Operating Margin was 17.4 percent.

“The weakness came from supplies as well as hardware, which management attributed to weaker demand, higher inventory levels and pricing. However, we see HP Inc stabilizing supplies by FY17 end,” Garcha commented.

The analyst continues to be positive about the company’s ability to penetrate the commercial space in order to boost the recurring and profitable supplies business. Supplies contributes more than 90 percent of the company’s Operating Income, and a rebound in this business would stabilize and boost HP Inc’s OI.

In the report Credit Suisse noted, “We also take into account a materially higher margin profile structure for HP's business inkjets vs. laser printers. We assume supplies revenue of $13.1bn/$12.9bn (-6.0%/-1.5% y/y) for FY16/17.”

PSG revenues came in at $7.69bn, representing growth of 14 percent y/y and 2.7 percent q/q. OP of $294mn beat expectations. “With an aging installed base, new OS, and new touch-friendly form factors, we believe growth could return to the PC industry in F2H16. Our PSG estimates stand at $28.6bn/$27.4bn (-9.1%/- 4.4% y/y) for FY16/17,” Garcha added.

The adjusted EPS estimates for FY16 and FY17 have been reduced from $1.70 to $1.60 and from $1.75 to $1.61, respectively.

Garcha believes that HP Inc. has a strong franchise and a multi-faceted strategy, which could help offset secular pressures in its end-markets. He expects the company to generate modest low single-digit operating income growth as the visibility into printing supplies improves.

Hewlett Packard Enterprise: Secular Challenges In IT

HP Enterprise generated robust revenue and OP, specifically, for EG, ES and Software. Garcha said, however, that secular challenges in the IT market represent a headwind for the business.

The revenue estimates for FY16 and FY17 have been raised from $48.7bn to $49.4bn and from $48.8bn to $49.8bn, respectively. The adjusted EPS estimates for FY16 and FY17 have been reduced from $1.93 to $1.90 and from $2.05 to $2.03, respectively.

Turnaround of the Enterprise Services OPM continued, with margin expansion to 8.2 percent, up 220bps q/q and 140bps y/y.

In the report Credit Suisse noted, “As the company is now firmly in the guided 7-9% range, we feel comfortable with the targets. In addition, we note achieving 9% could add $400-450mn of EBIT, or ~9% to HPE's EBIT overall. We see this earnings expansion to continue as a new customer base ramps up and the sizable cost reduction programs roll out (over $2bn yet to be implemented).”

Enterprise Group delivered robust revenues of $7.36bn, representing growth of 1.2 percent y/y, 5.0 percent q/q. Revenue growth was driven by ISS and Networking and strong OM of 14.0 percent.

Garcha commented, “We do remain concerned that the secular impact of the public cloud (driven largely by players like AWS) would pressure the revenue growth for the traditional IT vendors including HP Enterprise. In aggregate, for FY16/FY17 we forecast EG revenue of $27.2bn/$27.4bn and OMs of 13.2%/13.2%, resp.”