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HP (HPQ) Down 16.7% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for HP (HPQ - Free Report) . Shares have lost about 16.7% 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 drivers.

HP’s Earnings and Revenues Surpass Estimates in Q2

HP Inc. delivered better-than-expected results for the second quarter of fiscal 2022. The personal computer and printer maker’s second-quarter earnings and revenues surpassed the respective Zacks Consensus Estimate and marked a significant year-over-year improvement.

HP reported a solid bottom line for the second quarter, wherein its non-GAAP earnings jumped 16.1% year over year to $1.08 per share from the 93 cents reported in the year-ago quarter. The figure surpassed the Zacks Consensus Estimate of $1.06 and was in line with the upper end of management’s guided range of $1.02-$1.08.

The significant year-over-year increase in earnings reflected the benefits of higher revenues and favorable pricing, a product mix and currency exchange rates, partially offset by higher commodity costs and increased investments in innovation and the go-to-market strategy.

HP’s net revenues increased 3.9% year over year to $16.5 billion and beat the Zacks Consensus Estimate of $16.07 billion. In constant currency (cc), revenues grew 4.9%.

The robust top line reflected the strong demand for HPQ’s personal systems and printers. However, revenues were negatively impacted by continued component supply-chain constraints. Also, pandemic-related factory shutdowns worldwide, along with transportation disruptions and congested ports, negatively impacted HP’s overall sales.

Quarter in Detail

Personal Systems revenues (69.7% of net revenues) came in at $11.5 billion, 9% higher than the year-ago quarter (up 11% in cc). The year-over-year growth reflected the strong demand for PCs and the positive impact of the big shift to mainstream and premium commercials. Further, consumer revenues decreased 6%, while commercial revenues increased 18%.

HP’s total PC units sold were down 17% on a year-over-year basis due to expected supply-chain challenges, logistics delays and a lower chrome mix. Notebooks registered a year-over-year decline of 23%, while desktop units increased 11%. Notebook revenues increased 3% year over year to $7.73 billion, while desktop sales grew 28% to $2.86 billion. Workstation sales jumped 21% to $494 million.

HP noted that the demand for its products under the Personal Systems segment remained strong during the reported quarter. The company stated that despite continued supply-chain constraints, it managed to reduce its order backlog sequentially.

HP is witnessing a strong rebound in its Printing business, which was affected by office closures during the pandemic. However, due to continued manufacturing and component supply constraints, HPQ failed to meet demand.

Printing business revenues (30.3% of net revenues) decreased 7% year over year (down 6% in cc) to $5 billion, mainly due to lower hardware units and supplies revenues, partially offset by favorable pricing in hardware and growth in industrial graphics and services.

HP’s total hardware units sold decreased 23%. Consumer Hardware units declined 24%, while revenues plunged 12%. Further, Commercial Hardware units decreased 17%, while revenues decreased 4%. Supplies revenues declined 6%.

Region-wise, at cc, revenues from America (41%), the EMEA (37% of second-quarter revenues) and the APJ (22%) climbed 1%, 7% and 10%, respectively.

Operating Results

Segment-wise, Personal Systems’ operating margin expanded 20 basis points (bps) to 6.9%, primarily driven by favorable pricing, a product mix and currency exchange rates, partially offset by higher commodity costs and increased investments in the go-to-market strategy.

The Printing division’s operating margin expanded 140 bps to 19.3% due to favorable pricing and improved performance at industrial graphics and 3D, despite increased commodity and logistics costs.

HP’s overall non-GAAP operating margin from continuing operations of 8.8% declined 30 bps year over year on the lower gross margin.

Balance Sheet and Cash Flow

HP ended the fiscal second quarter with cash and cash equivalents of $4.5 billion, up from $3.4 billion at the end of the first quarter of fiscal 2022.

During the quarter, HPQ generated operating cash flows of $0.5 billion and free cash flow of $0.4 billion. During the first six months of fiscal 2022, the company generated operating cash flows of $2.2 billion.

HP returned $1.3 billion to its shareholders in the form of stock repurchases ($1 billion) and cash dividends ($0.3 billion) in the fiscal second quarter. Also, HP returned 362% of its free cash flows.

Guidance

Buoyed by the strong second-quarter performance, HP raised its fiscal 2022 non-GAAP earnings per share (EPS) guidance range to the $4.24-$4.38 range from the $4.18-$4.38 range forecast previously. The company continues to estimate generating at least $4.5 billion in free cash flow during the fiscal year.

On the earnings conference call, HP said that it expects to buy back at least $4 billion worth of its common stock during fiscal 2022.

For the third quarter of fiscal 2022, HP estimates the non-GAAP EPS between $1.03 and $1.08. HP anticipates solid demand for personal systems, particularly in the commercial product category, in the current quarter and a favorable pricing environment.

However, the company expects that industry-wide component supply constraints might affect its ability to meet demand. Moreover, the ongoing pandemic is expected to cause some manufacturing, port and logistics disruptions, at least throughout fiscal 2022. These factors are expected to curb the company’s revenues in the ongoing quarter.

For the printing segment, HP projects robust demand for consumer printers and a continued improvement in the commercial segment as offices reopen. However, it projects the division’s performance in the third quarter to be similar to the second quarter due to continued component shortages and logistics delays.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

Currently, HP has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.

Outlook

HP has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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