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Morningstar | HP's Analyst Day Reaffirms Strategic Direction; Strong Fiscal 2019 Guidance; FVE Increased to $25

HP's analyst day showcased its progress in morphing into a more diversified firm by sharing product and service highlights. We are encouraged by HP's execution and road map, but we continue to expect a highly competitive marketplace to cap long-term excess economic returns. After incorporating insight from HP's presentations and its fiscal 2019 guidance, including a 15% dividend bump over fiscal 2018 and higher-than-expected EPS guidance for fiscal 2019, we are increasing our fair value estimate for no-moat HP to $25 from $23.

The company reaffirmed its commitment to grow its personal systems segment through premium and gaming products as traditional computer spending is expected to slow. Also, HP is investing in device-as-a-service, security, and virtual reality programs as growth engines. Our long-term thesis on HP's personal systems remains intact. We believe that Dell, Lenovo, and other smaller brands will inhibit potential long-term growth through intense pricing competition for computers and DaaS contracts, while consumers will continue to favor smartphone purchases over computer upgrades.

HP's printing segment showcased growth in its strategic focus areas of subscription-based ink, managed print services, industrial graphics presses, and 3D printing. The challenge HP faces is continuing growth in these largely nascent revenue streams. HP's graphic presses and managed services can ensure its supplies business has a recurring revenue stream, but existing players will make inroads difficult for HP. We do like HP's focus on manufacturing for 3D printing instead of small-scale 3D printing; however, this product line does not benefit from a recurring revenue stream of selling 3D printing supplies. While we believe that HP is making wise moves to make its brand stickier with customers, we reiterate our long-term thesis of upside being limited by an intensely competitive environment coupled with the macro trend of individuals printing fewer items.

HP expects to deliver at least $3.7 billion in free cash flow in fiscal 2019 while returning around 75% of its free cash flow to shareholders through dividends and repurchases. The company has $4 billion of cash authorized for share repurchases, and we now expect a fiscal 2019 dividend of $0.64 per share versus $0.56 per share in fiscal 2018. HP's three-year model expects non-GAAP operating margin of 3%-5% for its personal systems and at least 16% for its printing business. We believe that HP will proactively remove costs, gain from productivity improvements, and benefit from selling a higher-priced volume mix. However, in our view, competitors mimicking HP's strategic moves should drag on top-line and GAAP operating margin performance long term.