A month has gone by since the last earnings report for HP (HPQ). Shares have added about 9.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is HP due for a pullback? 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 Second-Quarter Fiscal 2021 Results
HP 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%.
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%.
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).
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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, HP has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. 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 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 looks promising. 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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