A 'Quarter Of Bad News': HP Disappoints On Sales, CEO Departure

HP Inc HPQ reported a "quarter of bad news," according to Morgan Stanley.

The Analyst

Morgan Stanley analyst Katy Huberty maintains an Equal-weight rating on HP with a price target lowered from $23 to $21.

Wells Fargo analyst Aaron Rakers maintains at Market Perform, price target lowered from $23 to $20.

Morgan Stanley: Shortage Of Good News

HP's fiscal third quarter report shows demand for its printer products weakened from poor demand, especially in the EMEA region, Huberty wrote in a note. The company suffered from a greater-than-expected disruption from operational changes and contributed to a supply growth miss at negative 7% versus expectations for 3.4% growth.

Management said it expects supplies to decline in fiscal 2020, which is short of the analyst's prior estimate for a 0.3% year-over-year growth.

HP did show an acceleration of growth in the commercial PC market from 7% last quarter to 10% and this helped offset the 11% decline seen in the consumer PC market. However, the PC market as a whole showed an average selling price (ASP) decline for the first time since mid 2017 as competitors pass on lower memory prices to consumers in a weaker demand environment.

CEO Dion Weisler will step down in the beginning of November and incoming CEO Enrique Lores needs perhaps as much as 18 months to "build confidence through execution."

Wells Fargo: 'Net Negative' Report

HP's quarter includes some areas of strength but is overall "net negative," Rakers said. On the positive side, Personal Systems Group revenue came in better than expected but was offset by weaker Imaging and Printing Group revenue.

The company continues to perform well in the A3 market and is expected to grow market share from 10% today to 12% by the end of fiscal 2020, the analyst said. Similarly, this is partially offset by expectations for the print supplies business to see a 4-5% revenue decline in 2019 which is worse than the prior guide of negative 3%.

"While HP's strong PSG revenue and operating margin performance in F3Q19 is a near term positive, we are cautious on the company's ability to maintain pricing amid the declining commodity environment," the analyst wrote in a note.

Price Action

Shares of HP hit a new 52-week low of $17.10 Friday morning and traded around $17.80 at time of publication, down 5.8%.

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Photo courtesy of HP.