HP Earnings: Sales Remain Soft, Although Improvement Is on the Horizon; Shares Fairly Valued

We maintain our $30 fair value estimate for no-moat HP HPQ shares after the firm reported fiscal second-quarter results at the high end of its guidance range. Management narrowed its fiscal 2023 non-GAAP EPS outlook range, as the firm gains greater visibility into the second half of the year. While macroeconomic headwinds remain steadfast, the firm believes it is at a turning point and expects reduced channel inventory, favorable seasonality, and cost discipline to bolster second-half results. While cyclical dynamics affecting HP are transitory in nature, we do not view HP’s commodity-like offerings as moaty for the long term. We see shares as fairly valued.

Fiscal second-quarter revenue declined 22% year over year and 7% sequentially, reflecting continued soft demand environment for both businesses. Personal systems like PCs are seeing weaker demand than printing, as HP faces a competitive pricing market married with elevated channel inventory. For both businesses, consumer revenue performed the worst, partially offset by a favorable mix shift toward commercial sales.

Non-GAAP operating margin contracted 10 basis points year over year, but rose 90 basis points sequentially to 8.7%. We view this sequential increase as progress against the firm’s cost management initiatives, as well as an indication of tight supply for the firm’s printing business which is the more profitable of the two.

For the third fiscal quarter, management expects improved sales supported by pricing stabilization, seasonality, and normalized channel inventory levels. The firm is also executing well against its new cost restructuring efforts and is on track to reach its goal of 40% of structural run rate savings of $1.4 billion in fiscal 2023. For the full year, management now expects non-GAAP EPS in the range of $3.30 to $3.50, compared with $3.20 to $3.60 previously. We view targets as achievable, however, we remain cautious of macro factors affecting HP’s demand environment.