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Stock Analyst Update

Decent Results for HP, but Growth Potential Limited

3-D printing and a managed print service focus will provide new growth opportunities for HP, secular headwinds in traditional printing will limit overall growth.

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 HP (HPQ) delivered second-quarter results that were in line with our expectations for both revenue and earnings. Personal Systems and Print  continued their resurgence in the quarter, showing strength on both the top and bottom line. While we believe that 3-D printing and a managed print service focus will provide new growth opportunities for HP, we think that secular headwinds in traditional printing will limit overall growth.  We are maintaining our no moat rating and $22 fair value estimate per share. In our view, HP shares remain fairly valued.

Second-quarter revenue increased 13% from the prior-year period to $14 billion. Personal systems and print gained revenue, profit, and share growth. Personal systems maintained its strength from the first quarter as notebooks and desktops generated midteens sales growth. We continue to attribute this positive trend to hardware refreshes via Windows 10 adoption. Print’s success was carried by robust growth in commercial hardware, consumer hardware and supplies. HP's adjusted operating margin contracted by 20 basis points year over year, largely stemming from the integration of the Samsung printing business and R&D investment.

Adjusted earnings per share were in line with management’s prior guidance, coming in at $0.48. Management raised its GAAP diluted EPS guidance to $2.75-$2.82 from $2.53-$2.63 previously.

Along with second-quarter results, HP announced that CFO Cathie Lesjak, an HP veteran who has been with the company since 1986, will be retiring in early 2019. She will be replaced by Steve Fieler. We believe this will be a seamless transition for the company, as Fieler was with HP for 10 years prior to his most recent position as CFO of Proteus Digital Health.

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

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