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HP (HPQ) to Post Q2 Earnings: What's in Store for the Stock?

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HP Inc. (HPQ - Free Report) is set to report second-quarter fiscal 2018 results on May 29. The question lingering in investors’ minds is whether or not the leading global PC manufacturer will be able to post a positive earnings surprise in the quarter.

The company’s last quarterly results reflected overall revenue growth for the sixth consecutive quarter, after witnessing a prolonged period of decline. Furthermore, the Personal Systems and Print segments improved for the fourth straight quarter after 2010.

Notably, the company has a decent earnings surprise history. Over the trailing four quarters, the company’s results surpassed the Zacks Consensus Estimate thrice and came in line in one occasion. So, let’s see how things are shaping up prior to this announcement.

Notably, HP is one of the two companies which came into existence post the split from the parent company — Hewlett-Packard Company — in November 2015. The other company was Hewlett Packard Enterprise Company (HPE - Free Report) .

What the Zacks Model Unveils?

Our proven model does not conclusively show that HP is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP, and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

You can see the complete list of today’s Zacks #1 Rank stocks here.

It should be noted that stocks with a Zacks Rank #4 or 5 (Sell rated) are best avoided, especially when the company is seeing negative estimate revisions.

HP currently carries a Zacks Rank of 3 and has an Earnings ESP of 0.00%, which makes surprise prediction difficult. Furthermore, the Zacks Consensus Estimate for the fiscal second-quarter earnings remained unchanged, over the past 30 days.

Nonetheless, the company is expected to register year-over-year improvements in the top and bottom lines. The Zacks Consensus Estimate projects earnings per share to increase 20% to 48 cents from the year-ago quarter figure of 40 cents. Moreover, analysts polled by Zacks anticipate revenues to be up 9.7%, year over year, to $13.59 billion.

HP Inc. Price and EPS Surprise

Let’s check out the reasons behind this year-over-year improvement projection in revenues and earnings.

Revamped PC Business Bears Fruit

Post the split from parent company, HP adopted a strategy of focusing on product innovation & differentiation, pricing, and marketing and sales activities to spur demand for its PC products in the market. The company has launched various models under its PC product lines of EliteBook, Spectre and Pavilion Wave, over the past two years.

The impact of these initiatives is well highlighted by the fact that the company has regained the pole position in the PC segment. Also, according to data compiled by International Data Corporation (“IDC”), during first-quarter 2018, the company’s PC shipment registered the eighth straight quarter of year-over-year growth after witnessing several quarters of decline.

HP’s efforts to turn around the business have been commendable and seem to be on track, as indicated by its performance over the last few quarters. We believe benefits of the aforementioned initiatives will have positively impacted the to-be-reported quarterly results as well.

Per the Zacks Consensus Estimate, the PC segment is anticipated to have generated revenues of approximately $8.4 billion in the fiscal second quarter, reflecting 9.6% year-over-year growth.

Print Segment Playing Well

The company’s efforts to revamp its printing business have also been impressive. It should be noted that HP has acquired Samsung Electronics’ printer business. The acquisition is a strategic fit for HP as it expanded the company’s printing business, with the addition of 6,500-plus printing patents owned by Samsung.

In addition to the above, the company is now focused on fortifying its 3D printing business capabilities. However, unlike 3D Systems (DDD - Free Report) and Stratasys (SSYS - Free Report) , which target all kinds of consumers, HP is emphasizing only on industrial markets due to their ability to afford a premium range of 3D printing solutions. It should be noted that even though HP has been operating in this space for almost five years now, it still lags behind 3D Systems and Stratasys.

Nonetheless, these efforts have paid off well, with the company registering the fourth consecutive quarter of print-business revenue growth in first-quarter fiscal 2018. Per the Zacks Consensus Estimate, the Print segment is projected to have churned revenues of approximately $5.12 billion in the quarter to be reported, reflecting 7.9% year-over-year improvement.

Escalating Component Prices Impeding Profitability

HP’s product innovation, differentiation, marketing and pricing strategies are paying off as evident from the year-over-year jump in PC segment revenues and shipments for the past few quarters. Nevertheless, escalating component costs have been marring its margins, thereby eroding the benefits of higher revenues. Prices of components, such as DRAM and NAND, are still very high and therefore, we believe this might have dampened the company’s fiscal second-quarter profitability.

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