HP Alert: Citi Slashes Estimates, Warns Of Margin Pressure

• The share price of HP Inc HPQ plunged 72.65 percent over the past one year, to a low of $ 9.48 on January 28.
• Citi’s Jim Suva has maintained a Neutral rating on the company, while lowering the price target from $14.50 to $10.75.
• Although the shares are cheap at present, Suva believes that the stock would remain range bound till the EPS expectations are set lower and there is more stable demand for PCs and printers.

Analyst Jim Suva mentioned that the company has guided to FY2016 EPS of $1.59 - $1.67, “predicated on moderating revenue declines, coupled with significant savings from productivity gains.”

However, recovery in both the PC and the Print segments are expected to be pushed out, leading to risk to HP achieving its EPS target.

The company is scheduled to report its earnings in late February, at which time Suva expects HP to lower its annual guidance. This, in turn, would lead to lower consensus forecasts and estimates for EPS and cash flows.

Suva also explained that HP generates 60 percent of its revenues but only 20 percent of its operating income dollars from the PC segment. On the other hand, Printing segment contributes 40 percent of the company’s revenues but 80 percent of the operating income.

Recent comments from HP’s Print segment peers suggest that “recovery in print remains elusive with heightened emphasis on pricing intensity in supplies,” Suva said, while adding, “While HPQ has guided for recovery in supplies to be pushed out two years out, we believe margins are likely to come under additional pressure.”