HP's Q3 Print Has One Analyst Seeing 18% Upside

HP Inc HPQ reported fiscal fourth quarter earnings Tuesday that matched analyst expectations on the EPS line, but came in better than expected on the revenue line.

The Analyst

Loop Capital Markets' Ananda Baruah maintains a Buy rating on HP's stock with an unchanged $25 price target.

The Thesis

HP's revenue beat was driven by strength in both PCs and printing, but the company's operating margins fell short of what was expected, Baruah said in a research report. (See Baruah's track record here.)

The margin shortfall marks the second consecutive quarter in which HP decided to allocate its revenue outperformance to place more printer units —

and the PC business faced rising component costs.

Nevertheless, the earnings report reinforced the bullish case for owning HP's stock, as the company's guidance implies a "normalized" revenue growth rate in personal systems and printers, the analyst said. The guidance implies that personal systems, responsible for 60 percent of revenue and 20 percent of operating profit for HP, will be a "perpetual power," Baruah said. Printing, which accounts for 40 percent of HP's revenue and 80 percent of operating profit, will grow despite a "flattish market," he said. 

Over the longer term HP is in position to oversee new selling opportunities that could add $3 billion in 2019 or 2020, implying that the company is growing revenue at a 5 percent rate. As such, the company's 5 percent growth profile implies a "legitimate" growth profile and is "definitely not flattish," the analyst said. 

Price Action

Shares of HP were trading lower by nearly 5 percent early Wednesday morning.

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