HP Staying True to Course With Management Expectations to Start Fiscal 2023

We maintain our $30 fair value estimate for no-moat HP HP shares after the firm reported fiscal first-quarter results in line with guidance and reaffirmed its fiscal-year guidance. HP is dealing with soft demand across both personal devices and printing, which is slowing sales. Additionally, it is taking the firm’s distributors a few quarters to work through their inventory, which further slows new orders for HP. We see these cyclical dynamics as short-term in nature, but par for the course for a company like HP that plays in commoditylike markets that lack moats in our view. We see shares as fairly valued.

Fiscal first-quarter sales dropped 19% year over year and 7% sequentially, reflecting a continued cyclical downturn for both of HP’s businesses. Personal systems like PCs are seeing weaker demand than printing, but sales declined across the board. For both businesses, consumer demand is cratering while commercial demand is seeing more modest decreases.

Despite a bleak order picture, HP’s margins are holding up decently. Non-GAAP operating margin dropped 100 basis points year over year, but rose 10 basis points sequentially to 7.8%. We view 7.8% as a healthy level for the firm, and reflects tighter supply for the firm’s printing business which is the more profitable of the two.

Fiscal second-quarter guidance calls for further sequential sales declines. HP is setting expectations for the second quarter to be the trough of its current demand softness, with a relatively stronger second half to the fiscal year. The firm is also on track with its new cost restructuring efforts, which are set to last through fiscal 2025 and should improve profit margins in future years, especially with healthier top line demand. In the near term, expenses related to these efforts and soft demand mute the positive profitability effects.