The Street Debates What To Do With HP After Post-Earnings Plunge

HP Inc HPQ reported Wednesday with fiscal first-quarter results that matched expectations on the earnings line.

Revenue for the reported quarter fell short of expectations, and management's outlook is viewed by some as overly pessimistic. The following is a roundup of how some HP analysts on the street reacted to the print. 

The Analysts

• Wells Fargo's Aaron Rakers maintains a Market Perform rating on HP with a price target lowered from $26 to $23.
• Bank of America Merrill Lynch's Wamsi Mohan downgraded HP from Buy to Underperform with a price target lowered from $30 to $19.
• BMO Capital Markets' Tim Long maintained at Market Perform with a price target lowered from $22 to $20.
• Morningstar analyst Mark Cash maintained a three-star rating on HP and lowered its fair value estimate from $25 to $22.

Wells Fargo: Unexpected Issues

HP's printing revenue of $5.056 billion in the fiscal first quarter fell short of the $5.168 billion the Street was looking for, and the miss was attributed to an unexpected and material drop in supplies revenue, Rakers said in a Wednesday note.

Supplies revenue fell 3 percent from last year to $3.267 billion and missed expectations of $3.49 billion due to changes in consumer behavior, the analyst said. 

The company guided its supplies revenue to be down 3 percent year-over-year in fiscal 2019, which marks a reversal from prior guidance of flat to slightly up, Rakers said. This makes it difficult for the imaging and printing group to achieve a 16-percent EBIT margin for three reasons, the analyst said:

• Weakness in the Europe and Middle East region and a slowdown in sell-through will result in a reduction of channel inventory of $100 million.
• Market share data shows HP's share, especially in office, is notably lower than previously assumed.
• More commercial customers are moving to online purchasing, where the company has a lower market share.

HP's stock traded lower following the print due to the negative printer supplies performance, which may cause some investors to "incrementally gauge" the company's visibility into its four-box model, according to Wells Fargo. 

Related Link: HP Reports A Clean Q4 Beat, But Headwinds Keep Analysts On The Sidelines

Bank Of America: 7 Reasons To Turn Bearish

The bearish case for HP's stock can be made despite the company's leadership status in PC and print for seven reasons, Mohan said in the downgrade note. They are:

• Too much volatility around supplies growth.
• Management's unchanged guidance bar looks "high" due to the shortfall in supplies.
• It will take significant time and investments to regain market share from the omnichannel purchasing dynamic.
• Upcoming headwinds to cash flow from restructuring, investments and other factors in 2019.
• The risk of a PC slowdown.
• Longer-term loss from high-margin print supplies in other regions.
• Low confidence in management's longer-term margin target of 16 percent.

BMO: HP Can 'Iron Out' Problems

HP's report was disappointing, and a shortfall in supplies is to blame for the top-line miss, Long said in a Thursday note.

The company lowered expectations for the supplies segment and expects a revenue decline in 2019 — but HP can "iron out" any issues over the next few quarters by addressing inventory levels, adjusting its four-box model assumptions and addressing market share issues, the analyst said. 

Morningstar Names 3 Headwinds 

Morningstar continues to expect that HP will remain a leader in personal computing and printing, but a difficult long-term business environment is slowing its sustainable growth opportunities, Cash said in a Thursday note.

The analyst named the following as headwinds for HP:

• Industry moves toward mobile devices as supplements to or replacements for computers.
• PC hardware refresh cycles that are less dependent on operating system launches. 
• Less printing volume due to economic and environmental concerns. 

HP's growth initiatives should grow its market share in the consolidating PC and printing markets, but its upside will be limited by cost competitiveness among remaining vendors, in Morningstar's view. 

Price Action

HP shares were plummeting 18.65 percent to $19.38 at the time of publication Thursday. 

Related Link: JPMorgan Cites Lack Of Catalysts In HP Downgrade