HP Inc Needs To Focus On Stabilizing The Business

HP Inc HPQ reported better-than-expected EPS for its second quarter, with revenues modestly below consensus. However, the PC and printer maker slashed the high-end of its FY16 EPS view on weak printing business and tepid IT spending.

Amid slowing PC business, HP is relying on printing hardware and printing supplies for long-term growth. In fact, HP remains focused on maximizing the long-term opportunity in printing even though it is hurting near-term profitability, leading to the guidance revision.

"We view improvement in cash flow and the supplies business as encouraging, but its end markets remain challenging, which makes it tough for the stock to work. We remain on the sidelines until we see signs of improvement in top-line metrics," Mizuho analyst Abhey Lamba wrote in a note.

Meanwhile, HP continues to place hardware units where it can generate stronger cash flows over time, which is impacting its near-term profitability. In other words, the company is willing to take near-term hit in the printing hardware business for longer-term gains.

"We think it remains to be seen if the company can actually realize benefits over time as the environment remains tough for printing," Lamba noted.

HP reported second quarter EPS of $0.41 compared with consensus of $0.38 and revenues of $11.6 billion (down 12 percent year-over-year) versus consensus of $11.7 billion. Revenue for desktops and supplies came in slightly below expectations while other segments were relatively in-line.

Personal Systems revenues fell 9.9 percent year-over-year to $6.990 billion. Printing revenues dropped 16 percent to $4.637 billion, due to a 16 percent decline in supplies revenues.

The company also reported a correction in channel inventory that ended the quarter in-line with their target range. Adjusting for FX and inventory correction, the analyst noted that HP's supplies revenue was down only 3 percent in the quarter.

HP trimmed the high-end of its FY16 EPS forecast range to $1.59-1.65 from $1.59-1.69 previously. Consensus stood at $1.59 going into the print.

Lamba maintained Neutral rating on HP, and raised the price target to $12 from $10.