Justin Sullivan
HP (NYSE:HPQ) shares dropped more than 6% on Wednesday as the PC company reported weaker-than-expected results and guidance, that caused analysts to believe that shareholder returns could “moderate” going forward.
Cowen analyst Krish Sankar, who has a market perform rating on HP (HPQ), said that continued slowness in the broader economy and supplies for printers are hurting the company.
“HP’s trough earnings power is the next critical question,” Sankar said, adding that there would likely be more clarity on cost cutting measures on the company’s next earnings call.
On Tuesday, Palo Alto, California-based HP (HPQ) lowered its full-year estimates, saying it now expects to earn between $4.02 and $4.12 a share, excluding one-time items, compared to an earlier forecast of $4.24 to $4.38 a share. Analysts were expecting earnings of $4.30 a share.
The company also significantly lowered its free cash flow forecast, as it now expects it to be within a range of $3.2B and $3.7B, well below the prior view of at least $4.5B.
“We are taking clear actions to mitigate near-term market headwinds and further strengthen our business for the future,” Enrique Lores, HP President and CEO, in a statement. “I’m confident in our ability to execute against our priorities to drive long-term sustainable growth and value creation.”
For the period ending July 31, HP (HPQ) earned $1.04 a share, excluding one-time items, on $14.7B in revenue. Included in that was $10.1B from personal systems, well below the estimate of $11.06B in revenue. Free cash flow during the period was $300M, well below the $1.32B analysts were forecasting.
Despite the cut to free cash flow, Sankar said share repurchases and dividends are not expected to be impacted in the “near term,” but Bank of America analyst Wamsi Mohan said there is a concern buybacks could “moderate” over time.
Mohan, who rates HP (HPQ) underperform, noted that PC margins have continued to decline due to competitive pricing and there is the expectation that average selling price gains “erode.”
“Given weaker [free cash flow] trajectory, we see potential for shareholder returns to moderate [versus] high levels in past,” Mohan explained.
Mohan lowered his 2022 estimates on HP (HPQ) to a profit of $4.11 a share, on revenue of $62.8B and $4.11, compared to a previous outlook for earnings of $4.20 a share on $63.7B in sales.
Earlier this month, Wells Fargo downgraded HP (HPQ), citing an “increasing scenario” where its shares underperform on a relative basis for the rest of this year and into 2023, due to weakening PC demand.
