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Stock Analyst Update

HP Inc's Resurgence May Be Short-Lived

Despite a good increase in printer sales, we think the long-term secular headwinds facing both printing and PC markets make sustainable top-line growth unlikely.


 HP Inc (HPQ) reported strong results in the first quarter, with both revenue and earnings ahead of our expectations. Printer sales maintained their resurgence, while the company’s personal systems segment had significant growth in both desktop and notebook sales. Still, we think the long-term secular headwinds facing both printing and PC markets make sustainable top-line growth unlikely and would require a significant reversal in technological trends. After incorporating the improved full-year earnings and long-term tax guidance, we are increasing our fair value estimate to $22 from $19 and maintaining our no-moat rating for HP Inc. Shares were up sharply in after-hours trading, and we think the stock is fully valued compared with our new fair value estimate.

First-quarter revenue rose 14% versus the prior-year period to $14.5 billion, slightly ahead of our estimate. Desktop and notebook sales overcame the broader PC market headwinds, as sales increased 14% and 17%, respectively, versus the year-ago quarter, with gains coming from both commercial and consumer customers. We believe the strong performance is primarily a function of hardware refreshes as a result of Windows 10 adoption. That said, management indicated a shift toward higher-priced premium devices, which they expect will help compensate for increased input costs stemming from elevated DRAM prices. The printing segment has performed better after consolidating around higher-end printers and managed print services as companies shift to contractual offerings. Commercial hardware revenue rose 28% year over year while supplies generated solid growth of 10% in the quarter. However, adjusted operating margins decreased 20 basis points to 15.8% as a result of integrating Samsung’s print business, now organized as S-Print.

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