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HP Provides Guidance for Fiscal 2019, Increases Dividend

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HP Inc. (HPQ - Free Report) shared details of its long-term growth strategies and opportunities and provided its guidance for fiscal 2019 at the company’s 2018 Securities Analyst Meeting (SAM) held yesterday in New York City.

CFO Steve Fieler was quoted saying, “In FY19 we will continue to execute against our core, growth and future strategy, driving productivity improvements, and investing for the future to maximize shareholder value over the long term.”

Projections for Fiscal 2019

For fiscal 2019, the company estimates non-GAAP net EPS to be in the range of $2.12 to $2.22, which excludes certain items. The company’s free cash flow is expected to be at least $3.7 billion for the next fiscal.

The company plans to return 50–75% of annual free cash flow to shareholders in the long term. Moreover, nearly 75% of free cash flow, with a 15% increase in planned quarterly dividend amount and the balance through share repurchases, is expected to be returned to shareholders in the fiscal.

We note that the company expects to gain profitable share in the personal systems market backed by improvement in productivity. However, foreign exchange volatility, tariffs and component cost and availability will remain headwinds.

Although the company has not shared revenue guidance for the fiscal, it expects both personal systems and printing segments to outgrow the markets and gain significant share.

For the personal systems division, HP anticipates operating margin of 3-5%, while for the printing segment, it expects operating margin of at least 16%.

HP Inc. Revenue (TTM)

HP Inc. Revenue (TTM) | HP Inc. Quote

What's in Store for the PC Market?

After prolonged sluggishness, PC shipments recorded solid growth in second-quarter 2018, according to both research firms — Gartner and International Data Corporation (“IDC”). Both the firms believe that the improved PC shipment results were mainly driven by higher demand in business markets due to migration to Microsoft’s Windows 10.

Recent data from Canalys indicates that the global PC market will witness a slight recovery in 2019 with shipments of desktops, notebooks and 2-in-1s growing 0.3% after seven years of decline. The firm believes that the Windows 10 refreshment cycle and strong demand from APAC to be the key growth drivers. Besides, the firm also suggests component supply constraints to ease in 2019.

However, once the Window’s 10 replacement cycle is over, demand from the business circle is anticipated to weaken, which poses concern for companies dependent on the PC industry.

Per IDC’s latest estimates, unit shipments for the global PC devices market, which comprises traditional PCs, tablets, and workstations, will continue to decline throughout the forecast period (2018-2022) as shipment volume shrinks to 383.6 million at a five-year CAGR of -1.5% in 2022.

HP’s strong cash flow generation provides it sufficient resources to sail through the challenging PC market. We note that product innovation has helped HP maintain its leading position in the PC market. The company’s ability to innovate and continuous product launches will help it stay ahead of its peers. Moreover, HP’s initiatives of share repurchase and dividend hike will not only instil investors’ confidence but also boost earnings.

Zacks Rank and Stocks to Consider

HP currently has a Zacks Rank #3 (Hold)

A few better-ranked stocks in the broader technology sector are Aspen Technology (AZPN - Free Report) , Veeva Systems (VEEV - Free Report) and j2 Global (JCOM - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for Aspen, Veeva and j2 Global is currently projected to be 16.5%, 19.3% and 8% respectively.

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