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Will HP’s Printing Struggles Burn Investors in Q4?

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HP (HPQ) is scheduled to report its fiscal 2019 fourth-quarter earnings results on November 26 after the market closes. HP has beaten earnings estimates for the last seven consecutive quarters. However, it’s missed consensus revenue estimates in two of the last seven quarters.

We expect the company to continue to struggle with its printing business in the fourth quarter. We also expect unfavorable currency rates to affect its earnings and revenue. Meanwhile, its profits should benefit from a lower share count resulting from share repurchases.

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HP’s fourth-quarter earnings expectations

HP expects its adjusted EPS to be in the range of $0.55–$0.59 in the fourth quarter. In its Personal Systems segment, HP foresees pricing pressure from rivals taking a toll on its profits. In the Printing segment, the company expects weak supplies to continue to dent its revenue in the quarter.

Analysts expect HPQ’s sales and earnings growth to remain sluggish. They expect its revenue to fall 0.75% to $15.3 billion in the quarter. Its revenue increased 10.33% in the fourth quarter of fiscal 2018. Analysts also expect its earnings to grow 7.4% YoY in the fourth quarter. Its earnings growth was 22.7% in the fourth quarter of fiscal 2018.

HP’s challenges

HP has been struggling with weak printer supplies since fiscal 2018. Its printing business saw revenue of over $20 billion in fiscal 2018. However, the business saw a decline after that.

During the third quarter, HP’s printing revenue dropped 5% YoY (year-over-year) due to weak printer supplies. Its printing revenue was also worse than expected. Management blamed leadership changes outside the US and a weak global economy for its printing struggles. Some third-party suppliers from China also hurt HP’s toner and ink cartridge sales, according to a report from Bloomberg. Third-party suppliers, especially in China, offered low-cost toners and cartridges. Further, the shift to digitalization has also significantly dented HP’s printing business. Offices have started using less paper amid the digital transformation.

Along with printing challenges, the PC maker is also operating in a stagnant market. HP expects continued weakness in PC demand amid a growing smartphone market in the fourth quarter. The company is now focusing on selling innovative and premium computers to gain revenue.

Amid these struggles, HP CEO Dion Weisler decided to leave the company, making jittery investors even more cautious. Weisler was replaced by Enrique Lores, who took the helm on November 1. Lores was previously leading HP’s imaging, printing, and solutions business.

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Considering the pressure on HP, Xerox Holdings (XRX) made an acquisition proposal to HP for $33.5 billion on November 5. However, HP rejected the proposal, stating that the offer price undervalued it. After HP’s rejection, Xerox threatened to go hostile. However, HP reiterated its decision and again turned down Xerox’s offer.

HP’s restructuring plan

Amid this weakness, HP is looking to reduce its costs to boost its profitability. In early October, HP announced a restructuring plan to expand its cost savings. As part of the plan, it stated that it would lay off around 7,000–9,000 employees by fiscal 2022. The company expects to spread the restructuring costs over the next three years. It plans to incur restructuring costs of around $500 million in the fourth quarter.

HP plans to save around $1 billion in operating costs by fiscal 2022. It plans to invest these cost savings in software and services.

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Share buybacks to boost fiscal 2019 earnings

Despite the expected weakness in the printing division, HP raised its fiscal 2019 earnings guidance in the third quarter. The PC maker now expects its EPS to be in the range of $2.18–$2.22. Further, it expects its adjusted 2020 EPS to rise to $2.22–$2.32, as announced on October 3.

Analysts expect HP’s EPS to be $2.21 in fiscal 2019, up 9.5% YoY. However, its earnings growth in fiscal 2019 is expected to be lower than the previous year’s 22.4% YoY. Analysts expect its rate of earnings growth to fall another 1.01% YoY in fiscal 2020.

Wall Street analysts expect HP’s revenue to rise 0.2% YoY in fiscal 2019, down from 12.3% YoY in fiscal 2018. However, they expect its sales to fall 1.04% YoY in fiscal 2020.

We believe share buybacks will mainly drive the company’s earnings. During the third quarter, it returned almost $800 million to shareholders in the form of stock repurchases and dividends. It was left with a share repurchase authorization of around $1.7 billion as of September 30, 2019. On September 30, HP’s board authorized an additional $5.0 billion worth of future share repurchases.

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Analysts’ thoughts ahead of HP’s fourth-quarter earnings

Among the 15 analysts covering HP, only two have “buy” ratings on the stock—up from one last month. About 12 analysts have “hold” ratings—down from 14 last month. One analyst has a “sell” rating—down from two last month.

Currently, analysts have given the stock an average 12-month target price of $19.95, almost the same as its November 22 closing price of $19.94. Its median target price was $20.00 on the same day.

On November 11, Evercore ISI upgraded HPQ to “outperform” from “in line.” It also raised the stock’s price target from $19 to $24.

However, last month, Goldman turned bearish on HP stock. Goldman analyst Rod Hall downgraded its rating to “sell” from “neutral.” He also lowered its price target to $14 from $18. The analyst expects a difficult environment for HP in fiscal 2020. He also expects sluggish PC growth to remain a headwind in addition to the printing business.

Stock price movement

HPQ rose 1.48% on November 22 and stood at $19.94. The stock is also rising during the trading session today. HP’s share price was up 0.5% at 10:20 AM ET. The stock has suffered significantly amid the company’s challenges over the last year. Year-to-date, it’s trading flat as of November 22. However, it’s shown improvements this month, gaining around 14.8% as of November 22.

We’re now awaiting HPQ’s earnings results, which will further affect its stock.

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