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HP Inc.’s notebook sales got a boost in its second quarter as more people rushed to equip themselves with the tools needed to work remotely, but the printing part of the business didn’t hold up as well.
Shares of HP HPQ, -11.86% are off more than 12% in Thursday trading amid continued challenges for HP’s printing business and the company’s decision to put off its plans for leveraged buybacks due to economic volatility.
“In the context of unprecedented uncertainty it is understandable that the company will delay the planned leveraged buybacks, but absent this catalyst, in our view, there isn’t much reason to add to positions in this stock through year-end,” wrote J.P. Morgan’s Paul Coster, who downgraded HP’s stock to neutral from overweight after the latest report.
HP Inc. revenue fell more than 11% and after adjusting for restructuring charges and other effects, the company reported earnings of 51 cents a share, down from 53 cents a share a year ago, the company reported early Thursday.
Opinion: COVID-19 could be the final nail in the coffin of HP’s printing business
Coster pointed to tough comparisons ahead for the personal systems business and a long road to recovery for the printing business, even as HP plans to launch new consumer printers in the fall that he said will “lock in lifetime value” to the company. Coster cut his price target by a dollar to $20 in conjunction with his downgrade.
Deutsche Bank’s Jeriel Ong took a mixed view of the situation.
“While the market is likely to react negatively to this news coupled with the fundamental quarterly report, we are encouraged that HPQ still plans to return >100% of FY20 free-cash flow and ~100% of what is likely to be a more normalized FY21 FCF to shareholders,” he wrote.
Ong thinks HP shares will remain “range-bound” as the company’s revenue growth is constrained. “While it is possible that revenue grows on easier [comparisons] a year from now or more, we question whether investors will believe the sustained nature of that growth in CY22 and beyond,” he wrote.
Ong has a hold rating on the stock and raised his price target to $18 from $17.
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BMO Capital Markets analyst Tim Long wrote that HP will face “higher pressure” in commercial printing until offices reopen, though the company expects better-than-normal seasonal trends in PCs during the July quarter.
“While HPQ remains committed to the $16 billion buyback over time, for now it seems less likely the first $8 billion will be executed within 12 months,” he wrote, while maintaining an equal weight rating and cutting his price target to $16 from $17. “We are increasingly cautious on printing’s headwind post Covid.”
At least two analysts raised their targets after the report, according to FactSet, while at least two lowered theirs. Of the 16 analysts tracked by FactSet who cover HP’s stock, five have buy ratings, nine have hold ratings, and two have sell ratings, with an average price target of $17.86.
HP shares have declined 28% over the past three months as the S&P 500 SPX, +0.84% has added 3.7%.
