HP Inc's Reinvestments Set Up A Strong 2017

HP Inc HPQ reported better-than-expected revenue, EPS and free cash flow for the July quarter, while lowering its FY16 EPS guidance to reflect plans to invest in additional hardware units to support long-term printer supplies growth.

Morgan Stanley’s Katy L. Huberty maintains an Overweight rating on the company, while raising the price target from $15 to $16.

Huberty believes the printer investments will drive EPS growth, going forward.

July Quarter Beat

For the July quarter, the analyst mentioned that outperformance in PCs drove the beat for the quarter, with HP growing 9 points faster than the overall PC market, with flat PC revenue year-on-year.

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“Share gains in consumer gaming helped ASPs while Chromebook mix in commercial segment was an offsetting headwind,” Huberty stated.

The company delivered operating margin of 4.4 percent, driven by cost control and favorable component pricing. Management expects the longer term margin range in PCs at 3.5–5.0 percent.

The stronger than seasonal PC revenue growth, along with negative cash conversion, drove the free cash flow upside of $815 million.

Outlook

“Looking forward, management expects the PC market to grow less than seasonal in F4Q with HP growing at a faster rate but still sub-seasonal,” Huberty went on to say, while adding, “Tightness in DRAM and LCDs will drive strategic inventory higher in F4Q which along with weaker PC mix pressures cash flow relative to F3Q.”

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