HP Shares Fall On Continued PC, Printer Woes; Analysts Weigh In

Shares of HP Inc HPQ plunged as much as 8 percent Thursday, despite reporting inline results, after the company warned of "tough quarters ahead" amid continued pressures in PC and Printer units.

PCs represented 62 percent of HP's revenue the first quarter, and printing accounted for the remaining 38 percent. PC revenue fell 13 percent in the quarter, while printing sales fell 17 percent.

HP faces stiff competition in printing from Japanese rivals apart from currency and secular headwinds. The company accelerated its restructuring program and said about 3,000 people will exit by the end of 2016 instead of over three years previously planned.

What Does The Street Think?

"The pace of erosion in the printing segment, which represents 77% of profits, appears problematic relative to expectations for profits to rebound in the second half. Until printing stabilizes, HPQ shares could remain at depressed levels," Pacific Crest analyst Brent Bracelin wrote in a note to clients.

Bracelin, who has a Sector Weight rating on HPQ, said since the vast majority of profits driven by printing, he need to see stabilization in the printing segment before having confidence in a sustainable profit recovery.

On the other hand, Ananda Baruah of Brean Capital has a Buy rating with $18 price target. He continues to view HPQ as an attractive asset on valuation, ongoing cost savings, and improving data points starting in the April quarter from PC's stronger contributions.

"We expect quarterly EPS to improve sequentially through FY16. Our $18 TP is 11x our FY16 EPS of $1.60 (vs. guidance of $1.59 -$1.69) and we continue to view the 4.8% dividend yield along with buybacks as attractive," Baruah said in a client note.

For the second quarter, HP expects non-GAAP EPS of $0.35-$0.40 and reiterated its fiscal 2016 adjusted EPS guidance of $1.59 to $1.69. Analysts, on average, expect earnings of $0.39 a share for the second quarter and $1.60 for the full year.
Shares of HP have dropped 24 percent in the last year and could see further downside.

"While a significant portion of rising fundamental risk has been factored in by the 21% sell-off so far this year, the fact that XRX and WDC are now valued below 4.0x EV/FCF implies further downside is plausible," Bracelin added.