Goldman Sees 'Significant' Challenges At HP

• The split of Hewlett-Packard Company HPQ creates two entities - a business-focused company named Hewlett-Packard Enterprises HPE and a company with the remaining operations named HP, Inc. HPI.
• Goldman Sachs’ Simona Jankowski initiated coverage of HP Inc. with a Neutral rating and the price target of $14.
• HP Inc. is expected to be adversely impacted by secular declines in PCs and printing, Jankowski mentioned.

HP Inc., which is the “remainco” after the spin-off of Hewlett Packard Enterprise from Hewlett Packard, includes the PC and printing businesses. This entity is scheduled to commence trading after the spinoff is completed on November 1.

Analyst Simona Jankowski said that the Neutral rating reflects the balance between attractive valuation and capital allocation “with the fundamental challenges related to secular declines in PCs and printing.”

HP Inc.’s revenues are divided between PCs and printing in a ratio of about 60:40. However, the operating profit split is approximately 20:80, since PCs generate a 3 percent operating margin, versus 18 percent by printing, Jankowski commented.

Both segments are declining due to a downturn in industry revenues. “Industry declines are driven by smartphone cannibalization for PCs and by the move to digital for printing,” the Goldman Sachs report stated.

Jankowski expects HP Inc.’s sales to decline by 7.7 percent in FY15, following a CAGR of -2.6 percent in FY12-14. The CAGR for FY16-17 has been projected at -2.6 percent as well. Revenues in FY16 are expected to be negatively impacted by forex headwind, since the company competes with several Japan-based printing vendors.

Jankowski projected “flattish” operating margins in the 8.8-9.0 percent range and a share count CAGR of -3.5 percent, resulting in an EPS CAGR of -1.3 percent through FY17.