HP's Outlook Disappoints, Shares Still Overvalued

HP (HPQ) reported third-quarter results that were in line with our expectations. The firm benefited from a moderate PC market recovery, but declines in the printer segment showed no signs of abating. Management expects their core businesses to endure a difficult fourth quarter following the British exit from the European Union, particularly in the supplies and commercial PC markets. We reiterate our no-moat rating and high uncertainty for the company. Despite the 6% pull back in after-hour action, shares remain overvalued and we recommend potential investors to remain on the sidelines.

Third-quarter revenue came in at $11.9 billion, down 4% year over year, but up 3% sequentially. Personal Systems revenue was flat, but grew 7% sequentially due to the strong sales in the Notebooks category (up 8% year over year and 12% sequentially) and modest sequential uplift in desktops and workstations. The new OMEN gaming portfolio and x360 Spectre products outperformed the overall PC market. However, the commercial market offset strength in the consumer market, a trend management expects to persist in upcoming quarters. Printing segment revenue declined 14%, and 10% in constant currency terms. Supplies revenue declined 18% in the quarter, and is expected to stabilize only towards the end of fiscal 2017. Despite the launch of eight new printer models in the quarter, we are not optimistic about a turnaround in the segment in the near future.

Gross margin declined 110 basis points sequentially to 18.3%, as competitive pricing and lower revenue impacted profitability. While non-GAAP operating expenses declined 25% year over year, this includes gains recorded from the sale of marketing assets, which obscures the extent to which cost-cutting initiatives impacted bottom line. Overall, non-GAAP EPS came in at $0.48, a 17% increase from the previous quarter.

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