HPQ Earnings: Stock Rises, Faces Pressure from Xerox

HP (HPQ) reported upbeat earnings and revenues in its fourth-quarter earnings results. The stock gained around 1.74% in extended trading. The company reported impressive earnings on Tuesday after the market bell. The company’s results crushed analysts’ estimates. HPQ also projected better-than-expected profits in fiscal 2020.

HPQ stock fell 0.45% on Tuesday and closed the trading day at $20.06. At the closing price, the company has a market value of around $29.7 billion. The stock is 17% lower than the 52-week high of $24.17 and 25.9% higher than the 52-week low of $15.93. However, the stock was almost flat. So far, the stock has gained 0.6% YTD (year-to-date).

HPQ earnings in Q4

The company reported an adjusted EPS of $0.60, which was well above the earnings guidance of $0.55–$0.59 per share. The earnings also beat analysts’ estimates of $0.58 per share. HPQ’s earnings have risen 11.1% YoY (year-over-year) due to improved margins and share buyback activities. In fiscal 2019, the company returned almost 85% of its free cash flows to shareholders through buybacks and dividends.

The revenue growth was weak in the fourth quarter, which management expected. HPQ’s revenues of $15.4 marginally increased 0.3% YoY in the fourth quarter. The YoY revenue growth has remained sluggish for seven consecutive quarters. The company blamed soft sales in its printing businesses for the drop in its overall revenues. The sales grew 1.8% on a constant currency basis.

A slowdown in Chinese markets and some European countries also dented HPQ’s business. The company’s CEO, Enrique Lores, discussed the slowdown during an interview with CNBC on Tuesday. He said that the company is prepared for the upcoming tariff hikes in December.

Segment revenues

In the fourth quarter, the company’s printing revenues fell 6% YoY (down 5% in constant currency) to $4.98 billion due to weak shipments and supplies revenues. The supplies revenues fell 7% on a constant currency basis. Hardware units also fell 9% YoY due to a fall in the commercial and consumer hardware units. Printing revenues lagged analysts’ estimates of $5.03 billion.

Personal Systems’ revenues grew 4% YoY (5% in constant currency) in the fourth quarter to $10.43 billion. Notably, Personal Systems’ revenues beat the consensus estimate of $10.27 billion. The segment’s revenues were mainly driven by commercial revenues, which rose 8% YoY. However, consumer net revenues fell 4% YoY. The total units increased 8% YoY due to more notebook and desktop units.

Changes in the business

During the quarter, Lores replaced former CEO Dion Weisler. Lores became HPQ’s CEO on November 1. The company also announced the acquisition of a security start-up, Bromium, in September. Meanwhile, the company unveiled a restructuring plan in early October. Under the restructuring efforts, HPQ would reduce its workforce to cut costs and boost profitability. The company plans to remove around 7,000–9,000 employees by fiscal 2022. HPQ expects to save about $1 billion annually.

Acquisition proposal from Xerox

HPQ’s earnings results came amid buyout talks from Xerox Holdings (XRX). While Xerox wants to buy HPQ, the company rejected the proposal twice. As a result, Xerox plans to take the acquisition bid hostile, according to a letter from Xerox’s CEO to HPQ on Tuesday. Xerox stated that it would make the $33.5 billion buyout deal directly to the company’s shareholders. The letter also said that Xerox wants “HP shareholders to solicit their support in urging the HP Board to do the right thing and pursue this compelling opportunity.” Investor Carl Icahn, who bought a 4.24% stake in HPQ, supports the merger.

HPQ’s board thinks that the $22 per share takeover offer (cash and stock) isn’t in shareholders’ interest. As a result, the company rejected Xerox’s proposal. The company said that the merger would undervalue HPQ.

HPQ earnings outlook

The company anticipates increased visibility in fiscal 2020. HPQ expects the adjusted EPS to be $0.53–$0.56 in the first quarter of fiscal 2020. Initially, analysts expected an EPS of $0.53 for the period. For fiscal 2020, HPQ expects an EPS of $2.24–$2.32. Previously, analysts expected an EPS of $2.23 for fiscal 2020.

Analysts expect HPQ’s sales to fall. For the first quarter, analysts expect the company’s revenues to fall 0.51% YoY to $14.6 billion. For fiscal 2020, the revenues will likely fall 1.3% YoY to about $58.0 billion. In comparison, the revenues grew 0.5% in fiscal 2019 and 12.3% YoY in fiscal 2018.

However, HPQ CFO Steve Fieler expects to witness chip supply constraints in the first half of 2020, according to a CNBC report. Last week, Intel (INTC) discussed limited PC chip supply in a letter to its customers. The tight chip supply would be a problem for HPQ’s PC business, which usually has a limited inventory buffer. Fieler noted that chip supply constraints could postpone the PC refresh cycle. Also, the issue would delay the upgradation to Microsoft’s Windows 10 operating system, according to CNBC.

Peer comparison

Cisco Systems (CSCO) and HP Enterprise (HPE) have gained 7.5% and 23.6%, respectively, YTD. Meanwhile, Juniper (JNPR) and Nokia (NOK) have fallen 2.6% and 39.8%, respectively, YTD.

On Tuesday, HP Enterprise topped its earnings estimates in the fourth quarter fiscal 2020. However, the company missed the revenue estimates. Cisco Systems also beat its earnings results in the first quarter of fiscal 2020. The company provided a soft outlook for the second quarter. Nokia missed the revenue estimates in the third quarter and slashed its revenue guidance for 2019. Juniper also gave a lower-than-expected revenue outlook for 2019 despite beating the earnings estimates in the third quarter.

Analysts’ recommendations after HPQ’s earnings

Among the 15 analysts tracking HPQ, two recommend a “buy,” 12 recommend a “hold,” and one recommends a “sell” on the stock. Analysts have an average target price of $20.52 on HPQ, which implies a premium of 2.3% based on its closing price of $20.06 on Tuesday.