Why Is HP (HPQ) Down 1.9% Since Last Earnings Report?
A month has gone by since the last earnings report for HP (HPQ). Shares have lost about 1.9% 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 the most recent earnings report in order to get a better handle on the important drivers.
HP Q4 Earnings Beat Estimates, Reaffirms FY23 View
HP reported better-than-expected bottom-line results for the first quarter of fiscal 2023. HP reported non-GAAP earnings of 75 cents per share for the first quarter, which surpassed the Zacks Consensus Estimate by a penny and came within management’s previously guided range of 70-80 cents.
However, the bottom line declined 32% from the year-ago quarter’s earnings of $1.10 per share. This was mainly due to lower revenues, increased pricing competition and unfavorable currency exchange rates, partially offset by efficient cost management.
HP’s net revenues of $13.8 billion fell short of the Zacks Consensus Estimate of $14.31 billion and declined 19% year over year. The dismal top-line performance was mainly due to a significant slowdown in consumer demand, a tightening corporate budget amid ongoing macroeconomic challenges and unfavorable currency exchange rates.
In constant currency (cc), revenues declined 15% in the first quarter. The dismal top line reflected a weak performance in HPQ’s Personal Systems and Printers segments.
Quarter in Detail
Personal Systems (“PS”) revenues (67% of net revenues) came in at $9.2 billion, 24% lower than the year-ago quarter (20% down at cc). The year-over-year plunge reflected a continued decline in consumer and commercial PC demand and excess inventory levels at channel partners. Further, consumer revenues decreased 36%, while commercial revenues declined 18%.
HP’s total PC units sold were down 28% on a year-over-year basis, with a 33% decline in Consumer PS shipments and a 24% slump in Commercial PS units. Revenues from the Consumer PS and Commercial PS segments registered a year-over-year decline of 36% and 18%, respectively.
The printing business’ revenues (33% of net revenues) decreased 5% year over year (down 2% at cc) to $4.6 billion, mainly due to lower Supplies revenues. Total Hardware units increased 2% year over year, with Consumer Printing units growing 3% and Commercial Printing shipments falling 8%.
HPQ registered a year-over-year decline of 3% in the Consumer Printing segment’s revenues, while the Commercial Printing segment’s revenues increased 2%.
Region-wise, revenues from America (41% of the total first-quarter fiscal 2023 revenues), the EMEA (34%) and the APJ (25%) declined 16%, 22% and 19%, respectively.
Segment-wise, Personal Systems’ operating margin contracted 240 basis points (bps) to 5.4%. Unfavorable currency exchange rates, increased promotional activity and favorable prior-period R&D partner funding caused a year-over-year contraction in the segment’s operating margin. However, Poly contributions and lower costs, including variable compensation and commodity costs, partially offset the headwinds.
The Printing division’s operating margin expanded 80 bps to 18.9%, driven by favorable overall pricing and operating expense management, including lower variable compensations. However, these were partially offset by higher commodity costs and the promotional pricing of favorable currency.
HP’s overall non-GAAP operating margin from continuing operations of 9.6% declined 70 bps year over year.
Balance Sheet and Cash Flow
HP ended the fiscal first quarter with cash and cash equivalents of $1.77 billion, down from $3.15 billion at the end of the previous quarter.
During the quarter, HPQ used $16 million worth of cash for operational activities and generated negative free cash flow of $0.2 billion.
HP returned $369 million to its shareholders in the form of stock repurchases ($259 million) and cash dividends ($100 million) in the fiscal first quarter.
Second-Quarter & Fiscal 2023 Guidance
For the second quarter of fiscal 2023, HP estimates the non-GAAP EPS between 73 cents and 83 cents.
The company reiterated its fiscal 2023 earnings guidance range of $3.20-$3.60 per share. It also continues to estimate generating free cash flow between $3 billion and $3.5 billion in the fiscal.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
At this time, HP has a nice Growth Score of B, though it is lagging a lot 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 B. 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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