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HP (HPQ) Up 8.8% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for HP (HPQ). Shares have added about 8.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is HP due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

HP’s Q4 Earnings Beat Estimates on Record PC Sales

HP reported better-than-expected fourth-quarter fiscal 2020 results on solid PC demand amid the COVID-19 pandemic-led remote-working and online-learning wave. However, weakness in commercial printer sales partially offset the benefits, resulting in a year-over-year revenue decline.

HP delivered fiscal fourth-quarter non-GAAP earnings from continuing operations of 62 cents per share, up from the year-ago quarter’s 60 cents. Moreover, quarterly earnings surpassed the Zacks Consensus Estimate of 52 cents per share as well as management’s guided range of 50-54 cents.

HP’s net revenues of $15.3 billion beat the Zacks Consensus Estimate of $14.6 billion but declined 1% year on year. In constant currency (cc), revenues inched up 0.1%.

Quarter in Detail

Personal Systems revenues (68% of net revenues) were $10.4 billion, flat year over year (up 1% in cc). Further, consumer revenues grew 24%, while commercial sales declined 12%. The company reported shipping a record 19 million units during the fiscal fourth quarter.

HP’s total units sold climbed 7% from the year-ago quarter. Notebooks registered a 25% jump, while desktop units dropped 31%, year on year. While notebook revenues increased 18% year over year, desktop and workstation sales were down 28% and 45%, respectively.

Printing business revenues (32% of net revenues) were down 3% year over year (down 2% in CC) to $4.8 billion. HP’s total hardware units sold were up 14%. Commercial Hardware units and revenues slid 10% and 22%, respectively, on a year-over-year basis. Further, Consumer Hardware units and revenues grew 18% and 21%, respectively. Supplies revenues edged down 1%.

Region wise, at cc, revenues from Americas (46% of net revenues) increased 4%. Meanwhile, revenues from Asia-Pacific (21%), and the Middle East and Africa (33%) decreased 6% and 1%, respectively.

Operating Results

Segment wise, Personal Systems operating margin contracted 20 basis points (bps) to 5.1%. Moreover, printing operating margin shrunk 80 bps to 14.8% on lower revenues.

Meanwhile, the company’s overall non-GAAP operating margin from continuing operations of 8% contracted 50 bps, year on year.

Balance Sheet and Cash Flow

HP ended the fiscal fourth quarter with cash and cash equivalents of $4.86 billion compared with the $4.68 billion recorded in the prior quarter.

During the reported quarter, the company generated operating cash flows of $1.9 billion and $1.8 billion in free cash flow. During fiscal 2020, the company generated operating and free cash flows of $4.3 billion and $3.9 billion, respectively.

During the fiscal third quarter, the company raised $3 billion through issuing senior unsecured notes and redeemed $1.6 billion of old notes maturing in 2020 and 2021.

HP returned $1.6 billion to its shareholders in the form of stock repurchases ($1.34BILLION) and cash dividends ($238 million) during the fiscal fourth quarter. In fiscal 2020, the company returned $4.1 billion to its shareholders, including $3.11 billion in stock repurchases and $997 million in dividend. During the fourth quarter and fiscal 2020, HP returned 88% and 105% of respective free cash flows.

Additionally, HP announced that its board of directors raised the quarterly cash dividend by 10% to $0.1938 per share. The newly approved dividend will be payable on Jan 6, 2021.

Guidance

For first-quarter fiscal 2021, HP estimates non-GAAP earnings between 64 cents and 70 cents.

HP anticipates solid demand for personal systems during the fiscal first quarter on the rising working-and-learning-from-home wave. Nevertheless, the company expects that the industry-wide CPU panel and semiconductor supply constraints might dampen its ability to meet demand.

For the printing segment, HP projects solid demand for home printers, and pricing to be strained due to competition.

During the fourth-quarter fiscal 2020 earnings conference call, HP noted it expects to return approximately $1 billion per quarter at minimum to shareholders in the near term.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 27.38% due to these changes.

VGM Scores

At this time, HP has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise HP has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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