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HP (HPQ) Plunges as Supply-Chain Disruptions Hurt Q2 Earnings

Zacks Equity Research

HP Inc. HPQ stock depreciated more than 5% during the extended trading session yesterday after the company reported year-over-year declines in second-quarter fiscal 2020 earnings and revenues. Supply-chain and manufacturing disruptions due to the coronavirus outbreak mainly hurt the PC maker’s results.

The company noted that its manufacturing operations were disrupted in the beginning of the fiscal second quarter due to factory closures in China. Later in the quarter, it witnessed manufacturing disruptions in Southeast Asia as well. The firm also faced logistics issues due to the lockdown in several parts of the world, causing delays in sales closures and elevated logistics costs.

HP delivered fiscal second-quarter non-GAAP earnings from continuing operations of 51 cents per share, down from the year-ago quarter’s earnings of 52 cents. However, quarterly earnings surpassed the Zacks Consensus Estimate by 15.9%.

HP’s net revenues of $12.47 billion missed the Zacks Consensus Estimate of $12.88 billion and declined 11% year over year. In constant currency (cc), revenues were down 10%.
 

HP Inc. Price, Consensus and EPS Surprise

HP Inc. Price, Consensus and EPS Surprise

HP Inc. price-consensus-eps-surprise-chart | HP Inc. Quote

Quarter in Detail

Personal Systems revenues (66% of net revenues) were $8.3 billion, down 7% year over year (6% in CC). Further, commercial as well as consumer revenues, each decreased 7%.

HP’s total units sold slipped 5% from the year-ago quarter. Notebooks registered a 5% climb, while desktop units dropped 23%, year on year. While notebook revenues remained flat, desktop revenues were down 18%, year over year.

Printing business revenues (34% of net revenues) were down 19% year over year (down 18% in CC) to $4.2 billion. HP’s total hardware units sold dipped 23%.

Commercial Hardware revenues plunged 31%, year on year. Further, revenues from Consumer Hardware and Supplies decreased 16% and 15%, respectively.                                                                         

Region wise, at cc, revenues from Asia-Pacific (21%) decreased 16%. Meanwhile, Europe, the Middle East and Africa (EMEA) revenues (37%) were 7% down. Revenues from Americas (42% of net revenues) declined 10%.

Operating Results

Segment wise, Personal Systems operating margin expanded 230 basis points (bps) to 6.6% on cost control. However, printing operating margin shrunk 320 bps to 13.2% on lower supplies revenues.

Meanwhile, non-GAAP operating margin from continuing operations of 8.7% advanced 20 bps, year over year.

Balance Sheet and Cash Flow

HP ended the fiscal second quarter with cash and cash equivalents of $4.05 billion compared with the $4.21 billion recorded in the prior quarter.

During the reported quarter, the company uses operating cash flows of $510 million and approximately $600 million in free cash flow. In the previous quarter, the firm had generated operating and free cash flows of $1.3 billion and $1.1 billion, respectively.

HP returned nearly $375 million to its shareholders in the form of stock repurchases ($123 million) and cash dividends ($252 million).

Guidance

HP expects the coronavirus crisis to adversely impact its top and bottom lines, and free cash flow in the fiscal third quarter.

For the fiscal third quarter, HP estimates non-GAAP earnings between 39 cents and 45 cents.

HP anticipates solid demand for personal systems during the fiscal third quarter driven by working-and-learning-from-home wave. Nevertheless, supply constraints are a major issue, and the company projects elevated components and logistics costs during the quarter.

Further, citing uncertainties related to the duration of the pandemic and the timing and pace of economic recovery, the company withdrew the fiscal 2020 earnings guidance. It had earlier projected earnings between $2.33 and $2.43 per share for the fiscal year.

HP expects to return approximately $16 billion to shareholders over the next three years. During the fiscal second-quarter earnings conference call, HP 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.

Zacks Rank & Stocks to Consider

HP currently carries a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader technology sector are NVIDIA Corporation NVDA, Apple Inc. AAPL and Fortinet, Inc. FTNT, all carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term earnings growth rate for NVIDIA, Apple and Fortinet is currently pegged at 16.9%, 10.7% and 14%, respectively.

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