EUR 850.00 For Business Accounts Only

Morningstar | Commercial Printing and Desktop PC Strength Keep HP Level in 2Q; Maintaining $22 FVE

No-moat HP grew revenue year over year in line with our expectations while margins were higher than anticipated. Compared with the prior year, the printing business declined by 2.4% and the personal systems division increased by 1.8%. Strength in desktop computing and workstation sales offset weakness in notebooks for personal systems. As expected, printing supplies weakness, due to a bloated amount of inventory in the channel, dragged down the printing business. HP expects CPU shortages to remain a hindrance in the next quarter while it continues to work through its printing supplies issues through 2019. While we believe that HP is finding pockets of growth in areas like premium and gaming computers alongside 3D printing and managed print services, we still remain cautious about the long-term growth prospects of its markets and we are maintaining our fair value estimate of $22 per share. HP shares are up 2% after hours and still trades at a modest discount, in our view.

In the personal systems business, total units were down 1% year over year (notebook units down 5% and desktop units up 6%); however, revenue growth mainly came from desktops sales increasing by 7%, workstations sales growing by 6%, while notebooks declined by 1%. Commercial revenue grew by 7% year over year, while consumer sales dipped by 9%. We believe that HP is finding success in attaching services and support to commercial business while benefiting from commodity component tailwinds.

For printing, supplies revenue declined by 3%, commercial hardware grew by 3%, and consumer hardware shrank by 9%. HP's push into A3 products, 3D printing, textile printing, and managed services is helping offset the trends of consumers printing less items, in our view. For the supplies business, HP is working through the $100 million worth of extra inventory throughout the remainder of 2019 and confirmed the 3% year over year decrease for 2019 has not changed.

For the third quarter, HP expects GAAP EPS in the range of $0.49-$0.52 and the company increased its 2019 EPS guidance to be $2.04-$2.11 from $2.00-$2.10 (non-GAAP is now $2.14-$2.21 from $2.12-$2.22). HP noted that the increase from 10% to 25% tariffs was included in the guidance range. We expect HP to come in at the high side of its targets for next quarter and the year, led by selling more premium type products and stemming issues related to printing supplies.

We expect HP to continue benefitting from the Windows 10 refresh cycle as many businesses are still planning on upgrading later this year and into 2020. With a focus on adding premium features, innovating in areas like gaming, and enhanced security features we still expect HP to be one of the three main players in the PC market. For printing, in our view, SmileDirectClub using 49 of HP's 3D printers shows how HP's products are being used to disrupt traditional solutions, and we expect HP focusing its 3D efforts on manufacturing will remain a pocket of growth. Having partners like Siemens and BASF are positive advances as HP looks to make products that are manufacturing grade. We like that HP is winning contracts within its managed print services business in the A3 segment, but longer-term we expect this market to remain competitive with players like Xerox and Canon. As HP looks to fix its supplies issues, management stated it will be revamping its model in Europe that was disrupted last quarter, be aggressive in defending genuine HP supplies products, grow its marketing to generate demand, and work with teams downstream to correct inventory.