The good news is, printer and personal computer maker HP Inc (NYSE:HPQ) more or less did as well as expected in its second quarter of the current fiscal year, and HPQ stock was even up a couple percent after Wednesday’s bell.
The bad news is, it wasn’t expected to do all that well, and managed to deliver on the lackluster outlook.
When all was said and done, HP earned an operating profit of 38 cents per share on $11.6 billion worth of revenue. The bottom line was in line with the profit of 38 cents per share of HPQ stock analysts were calling for, but the top line missed estimates of $11.72 billion.
Perhaps worse, earnings fell from a pro-forma 40 cents per share in the same quarter a year earlier, and sales fell well below last-year’s comparable revenue tally of $12.98 billion. Even on a constant currency basis, revenue tumbled a little more than 5%.
It was also the sixth straight quarter sequential revenue fell.
President and CEO Dion Weisler commented on the second-quarter numbers:
“This quarter we delivered strong results and solid progress towards our long term strategy. We achieved our operational objectives, unleashed truly amazing innovations, and grew in strategic areas of our business, despite tough market conditions. I’m confident in our ability to execute and remain committed to our plan for growth.”
As is so often the case, though, the corporate rhetoric doesn’t quite line up with the fiscal reality. The measurable (though not significant) selling of HP stock in Wednesday after-hours trading suggests investors recognized the numbers were less than as thrilling as described.
PC Headwinds Remain Too Strong
Weisler was right about one thing — HP has injected some innovation into its product lines. In recent months it has made a big splash in the PC gaming world with its heavy-duty laptop-based Omen. More recently it unveiled the world’s thinnest laptop. It just wasn’t enough to reinvigorate sales. The company’s PC business slumped 10% on a year-over-year basis.
As bad as its personal computing lines did, printers did even worse, with revenue down 16% compared to last year’s Q2 figure.
One bright spot… the company is improving efficiency. Cost of revenue as a percent of sales fell from 81.3% to 80.6%. Conversely, operating profits grew from 7.5% a year ago to 7.5% last quarter. Net earnings expanded from 5.3% to 6.1% of revenue.
Looking ahead, for the quarter currently underway, HP is planning on reporting per-share profits of between 37 and 40 cents. For the full year, the company now believes it will earn between $1.59 and $1.65 per share of HPQ stock; the top end of that outlook was reeled in from prior guidance. Analysts had been expecting, on average, a profit of 41 cents and $1.59 per share, respectively.
Bottom Line for HPQ Stock
HP isn’t a bad company. Indeed, one could argue it’s a well-run company that executes about as well as any other name out there. Strong execution and strong leadership can’t change the fact, however, that the PC market as well as the printer market are shrinking.
To that end, HPQ stock is an investment best left on watchlists for the time being, rather than in portfolios.
That said, there’s no denying it belongs on watchlists with the intent of stepping back into it at some point in the future. Dion Weisler is far more interested in real consumer-oriented innovation that former CEO Meg Whitman ever was, and when the environment finally improves (and HP may need to shrink its way to the right size), this company is still the heavy hitter in its respective markets.
Just don’t become impatient waiting for that day to arrive.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
