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There are Better Buys than HP at the Moment (HPQ)

Posted on Wednesday, May 27th, 2020 by Chris Markoch

There are Better Buys than HP at the Moment (HPQ)

Investors will be looking for clarity as Hewlett Packard Inc. (NYSE:HPQ) prepares to report second-quarter 2020 earnings on May 27, 2020. Whether or not the company hits analysts’ projections for revenue is largely irrelevant. On a year-over-year basis both sales and profit are likely to be down considerably.

However, investors will be keen to hear the guidance that Hewlett Packard (HP) will provide. HP was in the middle of a transformation prior to the outbreak of the pandemic. Investors will want to get a better sense of how far the lockdown and re-opening is affecting that plan.

What is Hewlett Packard Likely to Report?

From an earnings standpoint, it is likely that Hewlett Packard (HP) will deliver solid results that will meet the “less bad” test that many companies have been taking. The whisper number predicts the company will deliver 46 cents in earnings per share (EPS). That is one cent above analysts’ expectations.

However, on a year-over-year basis, and EPS of 46 cents will be nearly 20% lower than the 53 cents in EPS HP reported in the same quarter in 2019.

And the revenue story appears that it will tell the same story. Analysts project HP to deliver $12.73 billion in revenue. That would be a decline of 9.1% on a year-over-year (YoY) basis. It would also make it two consecutive quarters that HP had a YoY quarterly decline in revenue.

Once again, the story for HP will not be in what the current numbers say, but whether or not the company believes these numbers reflect a trough from the pandemic.

HP Stock is in Need of a Catalyst

Hewlett Packard Inc. is, for lack of a better description, the hardware side of Hewlett Packard. The company’s two major product categories remain personal computers (PCs) and printers. And while the company has delivered mostly solid results for the last five years, there has been very little growth to show for it.

In the last five years, HPQ stock has grown by approximately 12%. However, the S&P 500 Index is up over 35% in the same period. That’s not a ringing endorsement for the stock. A bullish investor might point out that the company’s stock price in 2018 was up to levels not seen in almost 10 years. However, prior to the March selloff, HPQ stock was down about 16% from its 5-year high set in 2018.

That leads you to believe that investors were seeing something they didn’t like about HPQ stock prior to the outbreak of the novel coronavirus. A closer look at the company’s two business units shows that each has different challenges.

It’s Not the Lockdown, It’s the Recovery

Hewlett Packard remains a very popular brand in the global personal computer market. According to the research firm Canalys, Hewlett Packard had 21.8% of the global PC market. That is second only to Lenovo (OTCMKTS: LNVGY)which has a market share of 23.9%.

The good news for HP is that they hold strong market share in a segment that is growing. In 2019, the personal computer industry posted revenue growth of 2.7%. That was the industry’s first year of full-year revenue growth since 2011. And in the previous quarter, HP recorded both 2% YoY growth and its fifteenth consecutive quarter of revenue growth in the personal computer segment.

The company was bolstered by the need for employees to have the proper equipment to work from home. But is that trend likely to continue? According to Canalys, business spending is likely to decrease for the rest of 2020. And growing unemployment numbers would be an additional headwind for PC sales.

The recovery is also going to be a key in the company’s fortunes in its printing division. This division is not enjoying the same success as the personal computer segment. In the quarter just ended, HP reported a YoY decline of 6.6% in revenue. That was the fourth consecutive quarter of declining sales. This points out one of the problems for HP. Printers have longer lifecycles than computers. And those lifecycles won’t be getting shorter in a recessionary environment.

HP has been making in-roads into growing its subscription service for selling printer ink. But there is no way those gains are enough to offset its declining printer volume.

The “New Normal” May Not Be In HP’s Favor

Hewlett Packard needs business to get back to normal quickly. But that’s not likely to happen. According to Brian Kropp, chief of research for the research firm Gartner, 41% of employees are likely to work from home part-time after the pandemic eases. “Ultimately, the Covid-19 pandemic has many employees planning to work in a way that they hadn’t previously considered.”

HP is showing an ability to maintain a positive cash flow even as revenue is declining. And the company returns over 80% of that cash to shareholders in the form of share repurchases and dividends. The dividend looks solid (the payout ratio is 31.25%) and the company has increased its dividend in each of the last three years. However, it’s unlikely that the company will continue with any share repurchases. There’s just no appetite for that in this market.

The bottom line is that HP seems to be a well-run company. But as an investor, the question you have to ask is if HP couldn’t outperform the market during the long bull market, then why should investors expect anything different now? Regardless of what you hear from earnings, there appear to be better growth stocks than Hewlett Packard at this time.



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View the "20 High-Yield Dividend Stocks that Could Ruin Your Retirement Portfolio".

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