A month has gone by since the last earnings report for HP (HPQ). Shares have lost about 2.1% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important drivers.
HP reported better-than-expected third-quarter fiscal 2020 results on solid demand for PCs amid the COVID-19 pandemic-led remote working and online learning wave. However, weakness in commercial printer sales partially offset the benefits, resulting in year-over-year declines in top and bottom-line performances.
HP delivered fiscal third-quarter non-GAAP earnings from continuing operations of 49 cents per share, down from the year-ago quarter’s 58 cents. However, quarterly earnings surpassed the Zacks Consensus Estimate of 43 cents.
HP’s net revenues of $14.3 billion beat the Zacks Consensus Estimate of $13.97 billion but declined 2.1% year over year. In constant currency (cc), revenues were down 0.2%.
Quarter in Detail
Personal Systems revenues (72.5% of net revenues) were $10.3 billion, up 7% year over year (9% in CC). Further, consumer revenues grew 42%, while commercial sales declined 6%. HP’s total units sold climbed 11% from the year-ago quarter. Notebooks registered a 32% jump, while desktop units dropped 30%, year on year. While notebook revenues increased 30% year over year, desktop and workstation sales were down 29% and 30%, respectively.
Printing business revenues (28.5% of net revenues) were down 20% year over year (down 19% in CC) to $3.9 billion. HP’s total hardware units sold were down 2%. Commercial Hardware units and revenues plunged 32% and 37%, respectively, on a year-over-year basis. Further, revenues from Consumer Hardware units and revenues grew 3% and 7%, respectively. Supplies revenues decreased 19%.
Region wise, at cc, revenues from Americas (44% of net revenues) declined 5%. Revenues from Asia-Pacific (23%) increased 2%. Meanwhile, Europe, the Middle East and Africa (EMEA) revenues (33%) were flat year over year.
Segment wise, Personal Systems operating margin contracted 10 basis points (bps) to 5.5%. Moreover, printing operating margin shrunk 340 bps to 12.2% on lower revenues.
Meanwhile, the company’s overall non-GAAP operating margin from continuing operations of 7.2% contracted 160 bps, year over year.
Balance Sheet and Cash Flow
HP ended the fiscal third quarter with cash and cash equivalents of $4.68 billion compared with the $4.05 billion recorded in the prior quarter.
During the reported quarter, the company generated operating cash flows of $1.67 billion and $1.6 billion in free cash flow. In the previous quarter, the firm had used operating cash flows of $510 million and approximately $600 million in free cash flow.
During the fiscal third quarter, the company raised $3 billion through issuing senior unsecured notes and redeemed $1.6 billion of old notes maturing in 2020 and 2021.
HP returned $1.2 billion to its shareholders in the form of stock repurchases ($953 million) and cash dividends ($251 million). In the first nine months of fiscal 2020, the company has returned $2.5 billion to its shareholders.
For the fiscal fourth quarter, HP estimates non-GAAP earnings between 50 cents and 54 cents.
HP anticipates solid demand for personal systems during the fiscal fourth quarter on the rising working-and-learning-from-home wave. Nevertheless, the company expects that the industry-wide CPU and panel supply constraints might impact its ability to meet demand.
For the printing segment, HP projects improvement from the fiscal third-quarter level across units, revenues, supplies revenues, profit dollars and margin rate. However, from demand perspective, the company anticipates commercial print to be depressed.
Furthermore, the company reinstated its earnings and free cash flow outlook for fiscal 2020. Notably, during its fiscal second-quarter earnings release, the company withdrew the fiscal 2020 earnings guidance, citing uncertainties related to the duration of the pandemic, and the timing and pace of economic recovery.
Nonetheless, the reinstated adjusted earnings guidance range of $2.16-$2.20 is lower than its previous forecast of $2.33-$2.43. The company anticipates to generate free cash flow between $2.5 billion and $3 billion during fiscal 2020.
During the fiscal third-quarter earnings conference call, HP said it expects to return approximately $1 billion per quarter at minimum to shareholders in the near term. During the fiscal second-quarter earnings conference call, HP had stated that it would return more than 100% of its fiscal 2020 free cash flow to shareholders in the form of share buybacks and dividend payments.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, HP has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, HP has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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