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Stock Analyst Update

Despite Beat, HP Faces Challenges

The no-moat company enjoyed a seasonally strong fiscal first quarter, but secular headwinds in printing and PC demand will weigh its ability to generate long-term top-line growth.


 HP (HPQ) reported solid fiscal first-quarter results that surpassed our revenue estimates while non-GAAP EPS were roughly in line with our expectations. The vast majority of HP’s revenue growth was driven by the company’s Personal Systems operating segment, specifically sales of notebooks and workstations. In the Printing segment, HP reported modest growth in consumer hardware but still faces challenges across its end markets. We were encouraged to see that HP is executing well on its rollout strategy for 3D printing while also outperforming the market in managed print services, reaffirming our investment thesis. Despite a seasonally strong fiscal first quarter, we think secular headwinds in printing and PC demand will weigh on HP’s ability to generate long-term top-line growth. That said, we are maintaining our $16 fair value estimate and encourage investors to wait for a wider margin of safety before investing in this no-moat company.

Revenue in the fiscal first quarter came in at $12.7 billion, up 4% year over year and 1% sequentially. Personal Systems contributed most to the company’s top-line growth for the quarter, reporting revenue growth of 10% year over year. Specifically, notebooks displayed 16% year-over-year revenue growth while workstations came in at 6% year over year. Further, the company witnessed double-digit growth across all three geographical regions, driven by share gains and innovation. However, HP’s printing segment reported a 3% year-over-year decline. Consumer hardware displayed modest 2% year-over-year growth while commercial hardware reported an 8% year-over-year decline. Additionally, supplies revenue was down 3% year over year, but the company indicated that the revenue trajectory is on track to stabilize by the end of fiscal 2017. Management indicated the acquisition of Samsung’s printer business is proceeding as planned and is expected to close in the second half of fiscal 2017.

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Timothy Feeney does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.