Can Hewlett-Packard (HPQ) maintain its winning streak? The global PC manufacturer has seen its share price surge more than 16% in the past thirty days, compared to a 4% rise in the S&P 500 index during that span.
A proposed M&A bid from Xerox (XRX) has been the driving factor for HP’s stock, but does a deal make sense? That is one of the main themes investors will focus on when Hewlett-Packard reports fourth quarter fiscal 2019 earnings results after Tuesday’s closing bell. Earlier this month, investors learned that Xerox has had discussions regarding the purchase of HP. While this deal could add synergies to the two printer and copier companies, HP — to this point — has balked at the idea.
Xerox, whose initial offer consists of 77% cash and 23% stock, according to CNBC sources, is not going out without a fight. Last Thursday, Xerox said it would consider a hostile takeover. On Tuesday a potential deal between the two companies will be of interest to analysts and investors. And HP must demonstrate that the improvements shown over the past year, namely in the company’s improving PC and Printer businesses, not only can be sustained (with or without Xerox), but is deserving of multiple expansion.
For the quarter that ended October, the Palo Alto, Calif.-based company is expected to earn 58 cents per share on revenue of $15.27 billion. This compares to the year-ago quarter when earnings came to 54 cents per share on revenue of $15.37 billion. For the full year, earnings are projected to increase 9.4% year over year to $2.21 per share, while full-year revenue of $58.59 billion would mark a 0.2% rise year over year.
Last month the company issued disappointing profit guidance for fiscal 2020. Another weak quarter or downbeat outlook will make it tough for HP to demonstrate it can independently drive shareholder value. In the third quarter the company delivered revenue of $14.6 billion, which surpassed Street estimates by $20 million, while adjusted EPS of 58 cents came in 3 cents above analyst expectations. For Q4, revenue is expected to fall 0.6%, while earnings is projected to grow at 7%.
The meager top and bottom-line forecasts aside, this is an important quarter for HP, particularly given what’s at stake. Xerox has a known corporate raider in Carl Icahn in its corner, and analysts estimate that Xerox can increase its takeover bid to $26 per share. This means that while Xerox is vastly smaller than HP, it is a legitimate threat to HP’s standalone status. And with HP stock trading near a two-year low, hard to see how HP management can convince shareholders that a 30% premium is not in their best interest.
As such, Tuesday’s results and HP’s outlook for fiscal 2020 is extremely important in determining the real value of HP shares. The company’s revenue growth is expected to dip in fiscal 2020, rising less than 1%. It’s likely for this reason that HP shares are valued at just 11 times fiscal 2020 estimates, which is about nine points below the S&P 500 index. Xerox believes it can realize more value. HP must put up a stronger argument.
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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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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