Sluggish PC Demand, Trade War Concerns Would Have Hurt HP’s Fiscal Q2 Results

HP Inc. (NYSE:HPQ) reports its fiscal Q2 results on May 23. The company had reported Q1 earnings that were in line with consensus, although revenues had fallen short of expectations due to declines in desktops, notebooks and supplies. With the demand for desktops and notebooks continuing its downward trend, we expect HP’s top line to remain under pressure in Q2. Also, given the renewed U.S. – China trade standoff, we will be looking for management commentary around the potential impact of this on HP’s business.

Notably, HP has been involved in a protracted legal dispute regarding its ill-fated acquisition of Autonomy in 2011, which resulted in a multi-billion dollar write off for HP in 2012. Autonomy’s CFO was recently sentenced on account of fraud and Autonomy’s CEO Mike Lynch is facing trial in the U.K. for similar lapses, and this will likely pave the way for HP to recoup some of its losses from the Autonomy deal in the near future.

We continue to maintain our fair value estimate of $29 per share. Our interactive dashboard on HP’s Q2 Earning Estimates outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation. Also, you will find more technology company data here.

A Quick Look At HP’s Revenue Sources

HP makes money selling personal computing devices, printing products and related technology solutions. There are two main segments of HP’s revenue ($57.1 billion in 2018)

• Personal systems group ($36.4 billion in 2018, 64% of total revenue): Segment revenue is derived from sale of notebooks ($22.5 billion in 2018), desktops ($11.6 billion in 2018) and workstations, handhelds and others ($2.2 billion in 2018).
• Imaging and printing group ($20.8 billion in 2018, 36% of total revenue): Segment revenue is derived from sale of hardware ($7.2 billion 2018) and supplies ($13.6 billion in 2018).

Revenue trends and Q2 expectations

• Personal systems group added $6.3 billion over fiscal 2016-2018 (CAGR of 10%) with notebooks revenue growing by $5.6 billion over this period (CAGR of 15%), desktop revenue growing by $1.6 billion (CAGR of 8%), and workstation and other revenues declining by $803 million.
  • HP has been focusing on premium form factors (convertible notebooks) and Device as a Service to offer contractual solutions.
  • In Q1, segment revenue grew to $9.7 billion (+2% y-o-y). For Q2, we expect segment revenue to grow to $9.4 billion (+7% y-o-y).
• Imaging and printing group added $2.5 billion over fiscal 2016-2018 (CAGR of 7%) with hardware revenue growing by $845 million (CAGR of 6%) and supplies revenue growing by $1.7 billion (CAGR of 7%).
  • HP has been focusing on contractual solutions, Graphics and 3D printing.
  • In Q1, segment revenue declined marginally to $5 billion. For Q2, we expect segment revenue to grow to $5.7 billion (+9% y-o-y).

We forecast HP’s EPS figure for full-year 2019 to be $2.03. Taken together with our forward P/E multiple of 14x for the company, this works out to a $29 per share price estimate for the company’s stock, which is about 50% ahead of the current market price.

Do not agree with our forecast? Create your own price forecast for HP by changing the base inputs (blue dots) on our interactive dashboard.