Here's What You Missed Out by Overlooking HP (HPQ) Stock

Shares of HP Inc. HPQ have been gaining solid momentum, of late. One of the major reasons behind this could be the company’s stellar second-quarter fiscal 2018 results. Also, encouraging third-quarter and full-fiscal outlook drove its shares higher.

Notably, the company has gained approximately 10.6% since it reported fiscal second-quarter results on May 29. In fact, HP has an impressive earnings surprise history with beat the Zacks Consensus Estimate in thrice in the trailing four quarters while matching the same on one occasion. It has an average positive earnings surprise of 4.2%. Backed by the impressive results, the company has issued an upbeat outlook for the third quarter as well as full fiscal.

The stock has outperformed the S&P 500 index in the year-to-date period. HP has returned 12.1% in the said period, while the index has gained 3.5%.

Let’s take a look at what factors are driving HP’s back-to-back robust quarterly performances.

Restructuring Initiatives Paying Off

It should be noted that since its split from Hewlett Packard Enterprise Company HPE in November 2015, HP has been trying to stabilize shrinking sales and eroding profits through a series of restructuring initiatives.

As part of its restructuring efforts, HP has adopted a strategy of focusing on product innovation & differentiation, pricing, and marketing and sales activities to spur demand for its PC products in the market. The company has rolled out a number of models under its PC product lines of EliteBook, Spectre and Pavilion Wave, over the past two years.

Impact of these initiatives is evident from the fact that the company regained the pole position in the PC segment by displacing Lenovo. Also, according to the data compiled by IDC, the company’s PC shipments registered the eighth consecutive quarter of year-over-year growth in Q1, after witnessing several quarters of decline.

The company’s efforts to revamp the printing business have also been commendable. It should be noted that HP has acquired Samsung Electronics’ printer business. This acquisition is a strategic fit for HP as it has expanded the company’s printing business, with the addition of 6,500-plus printing patents owned by Samsung.

In addition to the above, the company is now focused on fortifying its 3D printing business capabilities. However, unlike 3D Systems DDD and Stratasys SSYS, which target all kinds of consumers, HP is emphasizing only on industrial markets due to their ability to afford a premium range of 3D printing solutions. It should be noted that even though HP has been operating in this space for almost five years now, it still lags behind 3D Systems and Stratasys.

However, these efforts have paid off well, with the company registering the fifth consecutive quarter of print business revenue growth in the fiscal second quarter.

On the cost front too, HP has taken strategic steps, which includes divestment of its content management software tools and Customer Communications Management (CCM) assets to Open Text Corporation, and elimination of 4,500-5,000 jobs.

Per the company, the divestment of CCM has led to cost reduction and enhanced productivity, thereby boosting profitability. The job cuts are anticipated to generate annualized cost savings of approximately $200-$300 million from fiscal 2020 onward.

Impressive Valuations

The stock currently trades at a forward earnings estimate at 11.8x, which is way lower than the industry to which it belongs to average of 16.3x. Given its recent track record of revenues and earnings growth, as well as the long-term forecast, the stock is highly undervalued which signifies that it still has significant upside potential.

Moreover, HP has a VGM Style Score of A. We note that our VGM score highlights the determining elements in a stock that can push the stock price higher. We can essentially filter out the negatives and focus on the positives which drive its price.

Consequently, we believe the stock has huge potential to surge higher and therefore, investors should consider it for near-term opportunities. The stock currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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