Although the third-quarter earnings season is all but over, and this trading week is going to be shortened by the holiday, there’s still at least one more major earnings announcement in the queue. HP Inc (HPQ) — the post-split division of Hewlett-Packard Co. that makes PCs and printers — will unveil earnings results Tuesday after the close.
Tuesday’s earnings report, however, will still serve up the results jointly earned by the two divisions, as the split didn’t take place until the first day after the end of the previous quarter.
It’s also not clear to what extent each businesses’ results will be reported separately. Either way, the upcoming announcement will be in reference to the old HPQ stock, which was the combined entity.
HPQ Earnings Outlook
For the fourth fiscal quarter of 2015, HP is projected to earn 44 cents per share of HPQ, though jointly the two divisions are expected to post total income of 96 cents. Sales-wise, the printer and computer division is projected to report $12.84 billion worth of business, or less than half of the $26.36 billion analysts expect the two divisions to report on a joint basis.
The earnings call is certainly apt to stoke the fires of the debate over which of the two sisters is the better bet.
Hewlett-Packard Enterprise (HPE), which serves the larger corporate and government market by selling things like servers and high-end solutions had been tacitly (and overtly) deemed the stronger of the two heading into the split, especially in light of an industry-wide slowdown in PC sales. But HPQ is up more than 16% since becoming a separate entity, while HPE shares are down about 5% since the Nov. 1 breakup.
To that end, though not broken out to a per-share basis yet, HP had been offering detailed breakdowns of each unit’s basic results well before the split materialized. It’s in this data — charted below — we can see how personal system sales and profits have been waning, with printers sales and earnings also deteriorating (albeit it at a slower pace). Enterprise, conversely, has been holding its own, and is arguably making a little progress.
In that light, the preference for HPE vs. printer and computer-maker HPQ makes sense. The market hasn’t priced the two stocks accordingly since the divide, though. Tuesday’s news could accelerate or shrink the unexpected outcome so far.
2 Things for HPQ Owners to Chew On
Prior to the split, even with the quarterly divisional breakdown, it was easy to obscure one segment’s lackluster results with numbers from other units. Now, not so much. HP is going sink or swim on sales of PCs and printers.
With that as the backdrop, there are two key factors current and would-be owners of HPQ stock may want to ask themselves and ask the company before, during and after Tuesday afternoon’s conference call.
1. Have PC sales finally stabilized? The implosion of the personal computer market isn’t exactly news. The 8% to 10% dip in year-over-year PC sales in the third quarter is simply part of what’s become a long-term trend that started as far back as 2012 and finally got going in earnest in 2014, when tablets became plenty potent enough to replace computers for most personal computing needs. It mattered to HP, as it could never quite gain a foothold in the tablet market.
The good news is, some observers think the worst of the PC market’s demise is in the past, and that the introduction of Windows 10 will finally start to spur new PC demand rather than crimp it. The bad news is, not everybody agrees with that theory.
2. Can HP remain competitive in the printing business? It’s been the overlooked workhorse for a while now, with news of the company split and the demise of the PC industry taking center stage. But, HP still makes printers, and it’s still a pretty profitable business.
Of particular interest will be the growth of the 3D printing industry as a whole. The actual demand failed to live up to its initial hype, but late-comer HP may actually be getting into the business at the right time in the right way, aiming for quality machines that professionals will want rather than targeting hobbyists with low-cost machines.
Bottom Line for HP
In retrospect, the breakup of Hewlett-Packard couldn’t have happened at a tougher time for the division that would become HP.
Printers have largely become a commodity, and the 3D printer industry has yet to gel. Meanwhile, personal computers remain a huge question mark.
Unfortunately, even with Tuesday’s earnings report, investors may still not have a clear idea of what HPQ is actually worth, as the dust is still settling on the split at the same time its core industries are in flux.
It may take one or two more reported quarters after tomorrow’s results to really get a feel for the true health of HP.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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