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Why Is HP (HPQ) Down 11% Since Last Earnings Report?

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It has been about a month since the last earnings report for HP (HPQ - Free Report) . Shares have lost about 11% 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 the most recent earnings report in order to get a better handle on the important drivers.

HP Reports Q4 Results

HP reported fourth-quarter fiscal 2018 non-GAAP earnings from continuing operations of 54 cents per share, meeting the Zacks Consensus Estimate. The metric, however, improved 23% on a year-over-year basis.

HP’s total revenues climbed 10.3% year over year to $15.37 billion and also outpaced the Zacks Consensus Estimate of $15.2 billion. This better-than-expected top-line performance was driven mainly by strength in the Personal System business and the acquisition of Samsung’s printer (S-Print) business.

However, Intel’s CPU shortages, currency volatility and implementation of tariffs are near-term headwinds for the company. HP mentioned that the overall tariffs implemented through September, which did not have a material impact on the company, had affected its personal systems business as well as desktops. Nonetheless, strong demand for HP’s products makes us optimistic about the company’s growth prospects.

Quarter in Detail

The Personal Systems segment generated revenues (65.5% of total) of $10.06 billion, up11% year over year. The company is benefiting from growth across customer segments, geographies and products on the back of a strong product portfolio, go-to-market and supply chain.

Consumer and Commercial revenues both increased 11% year over year.

HP’s total unit sales rose 6% with Notebooks registering an 8% increase and Desktop units are up 2%. Revenues from Notebooks grew 14.4% while that of Desktops and workstations ascended 6% and 9.7%, respectively.

In the fiscal fourth quarter, HP’s market share in Personal Systems was 22.5%, aided by a good execution of strategy and focus on profitable growth.

Coming to the Printing business, the segment’s revenues (35.5%) were up 9.1% year over year to $5.3 billion. Print unit share of HP in the market was 42% in the reported period.

HP’s total hardware unit sales augmented 11%, backed by a 3%  Consumer hardware unit’s rise and the Commercial hardware unit’s year-over-year growth of 85%. This robust growth in Commercial hardware units chiefly stemmed from the recent inclusion of S-Print business.

Commercial Hardware revenues jumped 16% while revenues from both Supplies and Consumer Hardware reflected 7% growth.

Region wise, revenues from Americas were up 6% year over year. While the same from Europe, the Middle East and Africa (EMEA) climbed 9% and from the Asia Pacific and Japan region improved 17% year over year.

Margins

Gross margin declined 50 basis points (bps) on a year-over-year basis to 17.6% due to the addition of S-Print.

Non-GAAP operating expenses rose 7% year over year to $1.6 billion. This was mainly due to the inclusion of the S-Print business and increased investment in research and development plus go-to-market sales strategies.

Non-GAAP operating margin from continuing operations contracted 20 bps to 7.1%.

Segment wise, operating profit of Personal Systems surged $37 million from the year-ago quarter on the back of higher ASPs and volume. However, higher commodity and logistics costs coupled with the impact of tariff were a dampener. Operating margin of 3.8% remained flat year over year.

Operating margins for Printing declined 50 bps to 16.1% due to S-Print inclusion, strong unit placements and investments in A3 and 3D printing.

Balance Sheet and Cash Flow

HP ended the fiscal fourth quarter with cash and cash equivalents of $5.2 billion compared with $6.2 billion recorded in the previous quarter. The company had long-term debt of $4.5 billion, which remained unchanged from the last reported quarter.

The company generated cash flow of $4.5 billion from operational activities and $1.5 billion free cash flow during the quarter under review. HP repurchased shares worth $598 million and paid dividends worth $219 million during the same time frame.

Outlook

For fiscal 2019, HP estimates non-GAAP earnings to be between $2.12 and $2.22.

Management notes that the global trade environment, currency fluctuation and industry component availability remain key challenges in fiscal 2019. CPU supply constraints to remain an overhang on Personal Systems during the first half of 2019.

The company, however, not considered any impact from incremental unannounced tariffs or demand changes arising from geopolitical uncertainties.

On the cost front, it anticipates improvement in overall component and logistic costs for Personal Systems as compared to the fiscal fourth quarter’s tally, which might offset the currency woe in turn.

In the Printing business, the company expects overall Supplies revenues to be flat to slightly up for the full year.

Taking the fiscal first quarter into account, HP projects non-GAAP earnings from continuing operations in the range of 50-53 cents per share.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

At this time, HP has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second 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.

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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