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HP's Last Earnings As One Company: How To Play Both Stocks Going Forward?

HP's Last Earnings As One Company: How To Play Both Stocks Going Forward?
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  • HP Inc (NYSE: HPQ) shares have plunged 67 percent year-to-date, while shares of Hewlett Packard Enterprise Co (NYSE: HPE) are down 14 percent over the same period.
  • Pacific Crest’s Brent Bracelin maintained a Sector Weight rating on the companies, while BofA Merrill Lynch’s Wamsi Mohan had a Buy rating on HP Inc, with a price objective of $17.
  • Printing supplies performance declines may restrict company’s margins going forward, the analysts believe.

Decline In Printing Supplies Could Stress Margin Model

HP reported mixed October quarter results for its PC and Printing operations. The results were the last the company reported on a combined basis, resulting in some confusion given “the lack of granularity around actual segment operating expenses and margins,” analyst Brent Bracelin of Pacific Crest mentioned.

The company reported lower-than-expected Printing revenues of $5 billion due to aggressive pricing, channel inventory and currency headwinds. While printing represents only 38 percent of the company’s total revenues, it accounts for nearly 75 percent of operating profits, Bracelin noted.

“The 23% drop in commercial printing hardware sales coupled with a double-digit decline in the high-margin supplies segment heightens near-term risks to profits,” Bracelin said, while adding that a sustainable recovery next year may be difficult if the decline in commercial printing unit sales continues.

HP announced plans to right-size its cost structure, but reduced its EPS guidance range for F2016 by $0.08 to $1.50-$1.69. The EPS estimate for F2016 was reduced from $1.73 to $1.66 to reflect a challenging end-market for Printing and aggressive PC pricing.

Core Thesis Unchanged, Supplies Recovery To Take Longer

In a separate report BofA Merrill Lynch analyst Wamsi Mohan mentioned that HP’s weak Printing results are expected to drag the recovery in print supplies.

The Printing segment’s poor performance was attributable to an overall decline in the printer market, the company’s efforts to reduce channel inventory and management walking away from some printer deals that were not positive NPV, Mohan added.

The analyst expects the Supplies revenue trajectory for ink to stabilize by end-2017, given weaker hardware placements. This is likely to accelerate the company’s restructuring efforts to preserve margins.

“The PC market continues to be tough where industry channel inventory remains elevated; however, HP Inc. continues to gain share,” Mohan stated, while adding that the company’s share of the commercial PC market stood at 23.7 percent in F4Q15.

HP reduced its EPS and FCF guidance for F16. The EPS estimates for F16 and F17 have been reduced from $1.69 to $1.59 and from $1.87 to $1.75, respectively.

Latest Ratings for HPQ

Jan 2018BarclaysDowngradesOverweightEqual-Weight
Nov 2017Wells FargoReinstatesOutperformMarket Perform
Oct 2017CitigroupMaintainsBuy

View More Analyst Ratings for HPQ
View the Latest Analyst Ratings

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