From Underperform To Buy: Why BofA Sees HPQ's Growth Potential Amid Tight Cost Controls And Profitable Print Projects

BofA Securities analyst Wamsi Mohan upgraded HP Inc. HPQ from Underperform to Buy, raising the price target to $33 from $25 based on an improved Free Cash Flow (FCF) outlook and the resumption of capital returns.

Mohan expects the company to achieve a bottom in FCF in FY23, driving subsequent growth from improving PC outlook and lowering restructuring costs.

Drivers for FCF improvement also include a push to a higher upfront profitability model in Print.

The analyst thinks growth in overall operating profit dollars is possible, driven by higher NPV print projects (Large tank, Instant Ink, Graphics, 3D Print) and tight cost controls.

In addition, the resumption of capital return, as FCF normalizes, is anticipated to add a low single-digit percentage of EPS growth, Mohan adds.

HPQ is also seen as having an attractive valuation, especially given its recent material underperformance and a dividend yield of 4%.

Mohan expects HPQ to accelerate and recognize 40-50% of the $1.4 billion gross savings target from the Future Ready Transformation plan in FY23.

The upcoming Securities Analyst Meeting on October 10th is seen as the next catalyst, where HPQ is expected to guide non-GAAP EPS of $3.40-3.60 and FCF of $3.5 billion+.

The analyst anticipates PS margins to remain in the 5-7% range and sees a potential marginal upside to the current Print OM range of 16-18%—leverage target of 1.5x-2x.

Overall, Mohan has adjusted the F2023/24 EPS to $3.30/$3.49 versus the Street's $3.30/$3.40, indicating an expectation of better earnings performance.

Price Action: HPQ shares are trading higher by 1.69% to $26.10 on the last check Tuesday. 

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.