Will Investors Care If HP Cuts Guidance?

PC and printer maker HP Inc HPQ reports its second-quarter results on May 25, and UBS still sees the company's full-year EPS outlook of $1.59–1.69 "at risk."

"We continue to see risk to earnings guidance though the stock might not care," analyst Steven Milunovich wrote.

Rating, Expectations And Justification

Milunovich, who has a Neutral rating on the stock, expects second-quarter earnings of $0.38 a share on revenue of $11.7 billion, in line with consensus view. UBS's view, as well as the Street view, implies a drop of 56 percent in earnings and 54 percent fall in revenue from last year when HP earned $0.87 a year on revenue of $25.45 billion.

Gartner data for the calendar first quarter showed an 11 percent decline in PC units with HP picking up 30bp of share year-over-year. The analyst expects PC revenue for HP to fall by 8 percent, driven by continued share gain.

Milunovich projects a 12 percent dip in printing sales in the second quarter, with supplies falling 11 percent.

Related Link: Johnson & Johnson Aligns With HP To Create Personalized Healthcare Solutions

Any Catalysts Ahead?

"HP believes declines in PC and printers will moderate in F2H though aside from easier compares there are few signs of improvement in PC ODM numbers or printer competitor results," the analyst noted.

However, an improving euro would limit the revenue drag in the second half.

Milunovich is concerned that HP only reduced full-year FCF by $100 million related to the accelerated layoff of 3,000 workers, but company remains confident improving the cash conversion cycle back to 19 days.

"We view the $2.3 billion–2.6 billion FCF guidance as ambitious. It's a bit ironic that HPE is putting aside $4 billion for stock repurchase while staid HP Inc is talking about potential growth in copiers and 3D printing," Milunovich highlighted.

Innovations And Printing Segment

This week, HP unveiled its commercial 3D printing system, HP Jet Fusion 3D. The HP Jet Fusion 3D 4200 Printer will be delivered in late 2016, with the HP Jet Fusion 3D 3200 Printer following in 2017.

Printing accounts for 80 percent of profit, but printer margin fell 130bps to 17 percent last period on competitive pricing and lower volumes.

"Although the Yen has strengthened, it could take a few quarters for pricing to return to normal. The loss of lower COGS, however, could be felt immediately," the analyst elaborated.

The company expects the printer margin to be flattish the balance of year, which might be "optimistic."

"With a 4 percent yield, the stock has limited downside. Upside may be constrained until momentum returns," Milunovich added.

According to TipRanks, Milunovich has a success rate of 40 percent with an average return per recommendation of -0.5 percent. The analyst is ranked 2,658 out of 3,929 analysts.

Shares of HP closed Thursday's regular trading at $11.44. The analyst has a price target of $11.