HP (HPQ) Down 33.8% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for HP (HPQ). Shares have lost about 33.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is HP due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

HP Q1 Earnings Top, Personal Systems Revenues Rise

HP delivered first-quarter fiscal 2020 non-GAAP earnings from continuing operations of 65 cents per share, beating the Zacks Consensus Estimate by 3.45% and also the year-ago quarterly figure by 20.4%.

HP’s net revenues of $14.618 billion surpassed the Zacks Consensus Estimate of $14.613 billion but declined 0.6% year over year. However, in constant currency (cc), revenues rose 1%.

HP’s results in the fiscal first quarter benefited from strong growth in Personal Systems revenues. However, soft consumer market and weakness in the Printing business remain concerns.

Quarter in Detail

Personal Systems revenues (68% of net revenues) were $9.89 billion, up 2.4% year over year (3.8% in CC). Further, commercial revenues increased 7% but consumer revenues were down 7%.

HP’s total units sold rose 4% from the year-ago quarter. Notebooks registered a 2% climb while desktop units improved 7% year over year. Notebooks (41%), Desktop (20%) and Workstation (7%) revenues were up 1%, 2% and 6%, respectively.

Printing business revenues (32% of net revenues) were down 6.6% year over year (down 5.8% in CC) to $4.72 billion.

HP’s total hardware units sold declined 10%. Moreover, Consumer Hardware unit fell 10% and Commercial Hardware unit dipped 12% on a year-over-year basis.

Commercial Hardware revenues (7%) slid 1% year over year. Further, revenues from Consumer Hardware (4%) and Supplies (21%) decreased 13% and 7%, respectively.

Region wise, at cc, revenues from Asia-Pacific plus Japan region (23%) grew 4%. Meanwhile, Europe, the Middle East and Africa (EMEA) revenues (36%) were flat. Revenues from Americas (41% of net revenues) declined 1%.

Operating Results

Segment wise, Personal Systems operating margin expanded 250 basis points (bps) to 6.7%, driven by cost control. However, printing operating margin contracted 20 bps to 16% due to lower supplies revenues.

Meanwhile, non-GAAP operating margin from continuing operations of 8.1% expanded 120 bps year over year.

Balance Sheet and Cash Flow

HP ended the fiscal first quarter with cash and cash equivalents of $4.21 billion compared with $4.5 billion sequentially.

The company generated cash flow of $1.3 billion from operational activities and $1.1 billion free cash flow during the quarter under review.

HP returned nearly $900 million to its shareholders in the form of stock repurchases ($700 million) and cash dividends ($300 million).

Guidance

HP expects coronavirus to adversely impact its top line, bottom line and free cash flow in the fiscal second quarter.

For the second quarter of fiscal 2020, HP predicts non-GAAP earnings between 49 cents and 53 cents.

HP expects the competitive pricing environment and Intel’s CPU shortage to remain concerns for its Personal Systems business.

For fiscal 2020, HP now expects non-GAAP earnings between $2.33 and $2.43 per share, upped from the previous guidance of $2.24-$2.32.

HP expects to return approximately $16 billion to shareholders over the next three years, with minimum of $8 billion of shares repurchased in the 12 months. In order to support this, the company increased the total share repurchase authorization to $15 billion from $5 billion announced in October 2019.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -6.14% due to these changes.

VGM Scores

At this time, HP has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, HP has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.