Why Is HP (HPQ) Down 3.7% Since Last Earnings Report?
It has been about a month since the last earnings report for HP (HPQ). Shares have lost about 3.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is HP due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
HP Reports Q1 Results
HP first-quarter fiscal 2019 non-GAAP earnings from continuing operations of 52 cents per share are in line with the Zacks Consensus Estimate. Meanwhile, the metric improved 8% on a year-over-year basis.
HP’s total revenues of $14.7 billion missed the Zacks Consensus Estimate of $15.1 billion, but inched up 1% year over year. Weaker-than-expected sales in both its personal systems and printing businesses were dampeners.
Management alleged rising macro uncertainties and price sensitivity among customers to be undermining the company’s high-margin Printing business. Change in customer purchasing behavior with more commercial customers buying items online, negatively impacted HP’s Supplies share. Further, given the high inventory and pricing issues, the company expects sales for the Printing segment to decline over the rest of the year.
Moreover, Intel’s CPU shortages are likely to persist through the first half of 2019. Adverse currency volatility is another headwind to the company.
Quarter in Detail
The Personal Systems segment generated revenues (65.6% of total) of $9.7 billion, up 2.3% year over year. Industry-wide supply constraints and a tough year-over-year comparison were overhangs.
Consumer and Commercial revenues increased 1% and 3% year over year, respectively.
HP’s total unit sales fell 3% with Notebooks registering a 1% dip and Desktop units, down 8%. However, revenues from Notebooks and workstations grew 5.8% and 5.5%, respectively, while that of Desktops slid 3.3%.
Coming to the Printing business, the segment’s revenues (34.4%) were down 0.4% year over year to $5.1 billion. While growth in hardware revenues, increase in unit share and progress in contractual offering were a positive, the same was offset by disappointing total Supplies revenues, which affected the Printing business.
HP’s total hardware unit sales augmented 3%, backed by a 2% Consumer hardware unit’s rise and the Commercial hardware unit’s year-over-year growth of 4%. Commercial Hardware revenues rose 5% while revenues from Consumer Hardware reflected 2% growth.
Meanwhile, Supplies revenues declined 3% to $3.3 billion, driven primarily by EMEA where it fell 9%. The company witnessed a slowdown in sell-through from Tier-1 to Tier-2 channels during the reported quarter.
On the earnings call, management further highlighted that all commercial customers are purchasing supplies online and the company has a lower market share in that space as compared to its share of traditional commercial resellers and in-store retailers. Further, intensifying macro uncertainty and price sensitivity among customers have put pressure on both its share and Supplies pricing.
Region wise, at constant currency, revenues from Americas were down 2%. While the same from Europe, the Middle East and Africa (EMEA) climbed 2% and from the Asia Pacific and Japan region, improved 11% year over year.
Gross margin of 17.8% is flat on a year-over-year basis.
Non-GAAP operating expenses rose 1% year over year to $1.6 billion due to increase in SG&A expenses.
Non-GAAP operating margin from continuing operations of 7.1% has been flat year over year.
Segment wise, operating margin of Personal Systems was 4.2%, which expanded 70 basis points (bps), backed by better pricing and mix, partially offset by higher costs and currencies.
Operating margins for Printing increased 50 bps to 16.2%, driven by expense management, which was partially countered by unfavorable gross margins.
Balance Sheet and Cash Flow
HP ended the fiscal first quarter with cash and cash equivalents of $3.4 billion compared with $5.2 billion in the previous quarter. The company had long-term debt of $4.7 million, up from $4.5 billion in the last reported quarter.
The company generated cash flow of $900 million from operational activities and $700 million free cash flow during the quarter under review.
HP returned nearly $1 billion to shareholders in the form of stock repurchases ($720 million) and cash dividends ($249 million).
HP is looking to reduce Tier-1 channel inventory in order to lower the inventory in the entire ecosystem. This is likely to create a nearly $100-million headwind to Supplies revenues for the rest of fiscal 2019. The company expects this impact coupled with the “lower go-forward Supplies share and pricing assumptions” to cause a 3% fall in Supplies revenues for the current fiscal year. Earlier, the company predicted that in the Printing business, the overall Supplies revenues will be flat to slightly up for the full year.
Further, CPU supply constraints will likely remain an overhang on Personal Systems during the first half of 2019. However, the company projects CPU shortages to show improvements during the second half as well as the cost from the overall basket of Components and Logistics is anticipated to improve compared with the levels in the fiscal first quarter.
For the fiscal second quarter, HP predicts non-GAAP earnings between 50 and 53 cents.
For fiscal 2019, HP maintains non-GAAP earnings estimate between $2.12 and $2.22.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
Currently, HP has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
HP has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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