HP (HPQ) Down 10.8% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for HP (HPQ). Shares have lost about 10.8% 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 catalysts.

HP Meets Earnings Estimates, Misses Revenues in Q3

HP Inc. delivered mixed results for the third quarter of fiscal 2022. The personal computer and printer maker’s third-quarter earnings met the Zacks Consensus Estimate, while revenues missed the same.

HP reported a solid bottom line for the third quarter, wherein its non-GAAP earnings increased 4% year over year to $1.04 per share from the $1.00 reported in the year-ago quarter. The figure matched the Zacks Consensus Estimate and came at the lower end of management’s guided range of $1.03-$1.08.

The year-over-year increase in earnings reflected the benefits of favorable pricing, disciplined cost management and a better product mix, partially offset by lower revenues, higher commodity costs, unfavorable currency exchange rates, increased investments in innovation and the go-to-market strategy.

HP’s net revenues decreased 4.1% year over year to $14.7 billion and missed the Zacks Consensus Estimate of $15.5 billion. In constant currency (cc), revenues declined 1.9%.

The dismal top-line performance reflected a weak performance in HPQ’s Personal Systems and Printers segments.

Quarter in Detail

Personal Systems revenues (68.7% of net revenues) came in at $10.1 billion, 3% lower than the year-ago quarter (flat at cc). The year-over-year plunge reflected a decline in demand for Chromebooks and weak demand in the company’s consumer business. Further, consumer revenues decreased 20%, while commercial revenues increased 7%.

HP’s total PC units sold were down 7% on a year-over-year basis. Notebooks registered a year-over-year decline of 32%, while desktop units increased 1%. Notebook revenues decreased 10% year over year to $6.57 billion, while desktop sales grew 13% to $2.54 billion. Workstation sales jumped 38% to $537 million.

HP is witnessing a strong rebound in its Printing business, which was affected by office closures during the pandemic. However, due to continued manufacturing and component supply constraints, HPQ failed to meet demand.

Printing business revenues (31.3% of net revenues) decreased 6% year over year (down 5% at cc) to $4.58 billion, mainly due to lower hardware units and supplies revenues, partially offset by favorable pricing in hardware and growth in industrial graphics and services.

HP’s total hardware units sold decreased 3%. Consumer Hardware units declined 1%, while revenues increased 1%. Further, Commercial Hardware units decreased 15%, while revenues decreased 3%. Supplies revenues declined 9%.

Region-wise, at cc, revenues from America (44%) and the EMEA (32% of third-quarter revenues) declined 9% and 6%, respectively. Revenues from the APJ (24%) region increased 8%.

Operating Results

Segment-wise, Personal Systems’ operating margin contracted 150 basis points (bps) to 6.9%, primarily due to higher commodity costs and unfavorable currency exchange rates, partially offset by a better commercial product mix and lower operating expenses.

The Printing division’s operating margin expanded 230 bps to 19.9%, driven by a rate improvement in hardware and efficient cost management, partially offset by an unfavorable mix.

HP’s overall non-GAAP operating margin from continuing operations of 9% declined 40 bps year over year.

Balance Sheet and Cash Flow

HP ended the fiscal third quarter with cash and cash equivalents of $5.39 billion, up from $4.5 billion at the end of the second quarter of fiscal 2022.

During the quarter, HPQ generated operating cash flows of $0.4 billion and free cash flow of $0.3 billion. In the first nine months of fiscal 2022, the company generated operating cash flows of $2.56 billion.

HP returned $1.28 billion to its shareholders in the form of stock repurchases ($1.03 billion) and cash dividends ($255 million) in the fiscal third quarter. In the first nine months of fiscal 2022, the company paid dividends of $788 million and repurchased stocks worth $3.55 billion.

Guidance

HP lowered its fiscal 2022 non-GAAP earnings per share (EPS) guidance range to $4.02-$4.12 from the $4.24-$4.38 range forecast previously. The company now estimates generating free cash flow between $3.2 billion and $3.7 billion, significantly down from the at least $4.5 billion projected earlier.

HP reaffirmed its commitment to returning $5 billion to shareholders through share buybacks and dividend payouts in fiscal 2022.

For the fourth quarter of fiscal 2022, HP estimates the non-GAAP EPS between 79 cents and 89 cents.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

The consensus estimate has shifted -18.82% due to these changes.

VGM Scores

At this time, HP has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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. It's no surprise HP has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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