Citi Skeptical On HP's Radical Shift In Its Supplies Pricing Model

Jim Suva of Citi is skeptical on HP Inc HPQ's radical shift in its supplies promotional pricing model; he maintains his Neutral rating on the stock.

In its supply pricing, HP is moving "from a push model to a demand-driven pull-in model," combined with compensation/incentive changes to "better align prices across multiple channels with an emphasis on everyday low pricing and to improve the efficiency of marketing dollar spend."

Saying that he is not aware of any print company making such pricing changes, Suva said, "While we believe the change in promotional strategy makes sense to optimize the marketing spend, we remain skeptical of the potential impact given distributor/channel business models and risk associated with competitive responses and potential market share loss."

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"Within PCs, HP believes Windows 10 and large installed base of aged PCs should drive a better second half 2016 and potential remains to continue to gain share at the expense of white box players," Suva elaborated.

Meanwhile, HP updated financial guidance following the sale of their marketing optimization assets to Open Text Corporation (USA) OTEX. HP likewise increased investments in the printing supplies segment to reduce channel inventories and adjust the promotional pricing model.

For the third quarter, HP raised its non GAAP EPS guidance to $0.43–$0.46 from $0.37–$0.40 (consensus at $0.39).

HP reiterated their FY2016 EPS guidance of $1.59–$1.65, but lowered their FCF guidance by about $300 million to reflect the impact from sale of software assets and reduction in supplies revenues. Suva maintains his 2016 EPS view of $1.59 versus consensus estimate of $1.60.

The analyst said rising competition in secularly challenged PC and printer market may put additional pressure on revenues and margins despite HP's leading market share position and cash flow generation.

"We believe HP Inc's current trading multiples are reflective of these positives and key risks," Suva added.

At the time of writing, shares of HP fell 4.80 percent to $12.69, while the analyst has a price target of $13.