HPQ Stock: Hewlett-Packard Earnings Are Worse Than It Looks

OK, so the previous fiscal quarter’s numbers from Hewlett-Packard (HPQ) weren’t terrible. That’s the good news. The bad news, however, is when the only silver lining to offer HPQ investors is, “it could have been worse,” it’s tough to remain optimistic in that company’s business acumen.

HPQ Stock: Hewlett-Packard Earnings Are Worse Than It LooksWhatever the case, with the last quarter before a major split of Hewlett-Packard already underway, shareholders have little choice but to hope the division (and the subsequent ability to focus on doing one thing really, really well) will put an end to an agonizing earnings trend.

HPQ Earnings

In Hewlett-Packard’s fiscal third quarter ended on July 31, HPQ earned 88 cents per share on $25.3 billion in revenue. The bottom line came in better than the per share of 85 cents analysts were collectively expecting, though the top line fell short of estimates for $25.4 billion.

Either way, both numbers were worse than their year-ago comparables. In the third fiscal quarter of 2014, Hewlett-Packard drove a profit of 89 cents per share on $27.58 billion worth of revenue.

Hewlett-Packard has now seen declining sales in 15 of its past 16 quarters.

Neither of this latest quarter’s bright spots or disappointments came as a real surprise: Hewlett’s enterprise-level hardware sales were up 2% year-over-year, but the printer and PC division saw sales dip 12% on a YOY basis, largely mirroring an industry-wide lull in PC sales. (Research firm IDC reports that global PC sales fell 10% in the second calendar quarter of 2015.)

Enterprise service revenue, too, came in 11% lower from year-ago levels. And the foreseeable future doesn’t look too bright either.

For the current quarter, HPQ is expecting per-share earnings to roll in between 92 cents and 98 cents, down from a profit of $1.06 per share of HPQ stock in the same quarter a year earlier. Analysts had estimated earnings of $1.00 per share for fiscal Q4, on revenue of $26.8 billion. The company drove $28.4 billion in revenue in the quarter ending on Oct. 31, 2014.

Based on the fourth-quarter guidance, HP should earn between $3.59 and $3.65 per share of HPQ stock in fiscal 2015, down from $3.74 per share in fiscal 2014.

Synovus Trust Company’s Daniel Morgan said of the disappointing numbers:

“We get it. They’re not growing. Yeah, everything’s bad, but maybe there’s some upside when they do split and things start to get going for them in the enterprise segment.”

And plenty of shareholders are praying he’s right.

Hewlett-Packard: Ready to Split

Regardless of the waning results, Hewlett-Packard is still en route to a split at the end of the fiscal year in late October, just in time to begin the new fiscal year as two distinct entities.

The company’s printer and PC business — the one that did so poorly last quarter — will become HP Inc. Meanwhile, the enterprise hardware and enterprise services division — the one that has “less disappointing” fiscal Q3 numbers — will become Hewlett-Packard Enterprise. And the two units are already largely operating separately.

It’s widely expected that the enterprise division will become the faster-growing of the two, if growth for either is in the cards. CEO Meg Whitman plainly said of the PC market, “The next several quarters we think are going to be pretty tough.”

Even so, there are those that think even the deteriorating PC market can still become a compelling arena again. IDC analyst Jay Chou opined:

“When HP Inc. is independent, you’re probably going to see them becoming more scrappy. A lot of their products are just commodity-based PCs. There’s not a lot of room for extra revenue from things like services and so on.”

Bottom Line for HPQ Stock

Given the long-term revenue and earnings trend, clearly something has to change. Splitting Hewlett-Packard may not be the end-all, be-all solution, but it’s a reasonable effort to restore growth from at least one of the two entities.

Be that as it may, given one of the numbers largely glossed over in the quarterly report, Hewlett-Packard may be in much more dire straits than it may appear at first glance … meaning the split better reinvigorate both sales and profits, and it better do so fast.

That overlooked number? Cash flow.

Last quarter, HPQ’s operating cash flow fell from $3.8 billion a year earlier to $1.7 billion this time around (PDF). Granted, the company as a whole may have incurred some unusual pre-split expenses. But fiscal Q2 operational cash flow also fell considerably, from $3 billion a year earlier to $1.5 billion for the quarter ended April 30th.

In other words, of all the things working against HPQ stock right now, waning liquidity may quietly be the biggest and most unnoticed headache … not that it’s doing particularly well on any other fronts.

Whatever the case, the company’s proverbial D-Day is approaching fast.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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