Hewlett-Packard Down to Strong Sell on Dismal Trends - Analyst Blog

On Apr 4, 2015, Zacks Investment Research downgraded Hewlett-Packard CompanyHPQ to a Zacks Rank #5 (Strong Sell). Going by the Zacks model, companies holding a Zacks Rank #5 are likely to underperform the broader market.

Most of the estimates have been moving downward since this tech giant reported mixed first quarter 2015 results on Feb 24. Also, tepid fiscal 2015 guidance remains an overhang on the stock.

Why the Downgrade?

Although the company's reported non-GAAP earnings surpassed the Zacks Consensus Estimate, revenues lagged the same. Also, its top line decreased 4.7% year over year, primarily due to unfavorable foreign currency exchange rates. Notably, the company generates approximately 65% of revenues from outside the U.S. Also, lower sales in the Printing, Enterprise Services, Software and HP Financial Services businesses impacted quarterly revenues.

The company's cash and cash equivalents declined to $12.92 billion from $15.13 billion as of Jan 31, 2015. Total debt stood at $15.55 billion.

According to Hewlett-Packard, fiscal 2015 earnings per share are likely to range within $3.53-$3.73 (previous guidance was $3.83-$4.03). The Zacks Consensus Estimate is pegged at $3.66. The company also expects full-year revenues to decline 4% to 6%.

Hewlett-Packard's PC business remains an overhang. The company generates approximately 30% of revenues from its personal system segment. According to IDC's 2015 report, PC shipments are expected to contract 4.9%, worse than the research firm's earlier forecast of a decline of 3.3%. The continued decline in PC shipments raises a question regarding the future of the company.

Also, desktop revenues in the last-reported quarter decreased 10% from the year-ago quarter, while units sold declined 7% on a year-over-year basis. As the computing business generates a significant portion of its revenues, the reduction in business volume in this segment is a major cause of concern.

Hewlett-Packard is also seeing secular declines due to the increasing shift to tablets and smartphones where it is yet to gain a foothold. Thus far, H-P has neither been able to dispose of this business due to its significant revenue contribution, nor make up for revenue declines in this business by generating sufficient volumes from other businesses.

A mixed performance in first-quarter 2015 and a not-so-encouraging outlook resulted in downward estimate revisions for Hewlett-Packard. Over the last 60 days, the Zacks Consensus Estimate declined 7.6% to $3.66 per share for 2015.

Furthermore, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from International Business Machines IBM and Oracle further add to the woes.

Stocks to Consider

Not all technology stocks are performing as poorly as Hewlett-Packard. We recommend Apple Inc. AAPL and Avago Technologies Ltd. AVGO , both of which sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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