Hewlett Packard’s (NYSE:HPQ) most recent earnings delivered a split decision for HPQ stock investors to ponder. On the top line, Hewlett Packard fell short of analysts’ estimates. The company posted $12.5 billion in revenue, which was shy of the $12.86 billion that analysts were predicting. It was a decline of over 8% on a year-over-year (YoY) basis, and the second YoY quarterly decline in revenue.
However on the bottom line, HP posted a nice beat of 51 cents EPS versus the 45 cents EPS that was estimated. That was still lower than the 53 cents EPS that HP posted in the same quarter in 2019.
HP also provided future guidance that was on the low end of prior estimates. The company is now forecasting earnings of 39 cents to 45 cents a share. Consensus forecasts called for 47 cents a share.
Given HP’s supply chain disruption at the onset of the Covid-19 pandemic, investors were less concerned about the company’s forward guidance than to the current results. After all, HP has been relatively strong for the last five years and has very little stock growth to show for it.
A bullish investor might point out that the company’s stock price in 2018 was up to levels not seen in almost 10 years. However, prior to the March selloff, HPQ stock was down about 16% from its five-year high set in 2018.
Clearly investors were seeing something they didn’t like even before the Covid-19 pandemic. Hewlett Packard has two major business units, personal computers and printers. And while the Hewlett Packard brand name is still strong, the two units face different challenges.
Hewlett Packard’s Business Units Face Short- and Long-Term Challenges
According to the research firm Canalys, Hewlett Packard has 21.8% of the global market for personal computers. Only Lenovo (OTCMKTS:LNVGY) had a higher market share at 23.9%. In 2019, the personal computer industry posted revenue growth of 2.7%. That was the industry’s first year of full-year revenue growth since 2011.
Revenue in this unit dropped 7% from the previous year, ending a streak of 15 consecutive quarters of revenue growth in the personal systems segment. However operating profits were up 43%, and the company did see a rise of 5% in notebook sales as workers geared up to work at home.
But Canalys is projecting that, not unexpectedly, business spending is likely to decrease for the rest of 2020. And if unemployment continues to increase, that would be an additional headwind for PC sales.
Plus, the company’s other division is printing. For all the things that HP trumpets as positives about the PC side of the business (expanding margins and rising sales), the opposite is true in the printing segment. Sales in the printing division fell 19% from the previous year. And operating profits declined by 35%.
The product lifecycles are longer than personal computers and won’t be getting shorter in a recessionary environment. Plus, although the company is gradually growing its subscription service for selling printer ink, the gains are not enough to offset the decline in overall sales volume.
Buy HPQ Stock for Value, Not Growth
I believe that Hewlett Packard faces some difficult-to-ignore challenges in its efforts to grow HPQ stock significantly in 2020. However, for value investors, the story is different.
Hewlett Packard ended the quarter with $4.1 billion in cash on hand. In the past, the company has been returning that to shareholders through share buybacks and dividends. The company has been in cost-cutting mode for some time and therefore there was some question about whether it would continue with its $8 billion share buyback program.
When pressed on the earnings call about that, CFO Steve Fieler was non-committal on answering if the full amount would be purchased. However, during a call with analysts, HP hinted that it would temporarily halt the program based on market conditions.
However, it still seems like the company’s dividend is safe. That’s because only 31.25% of the company’s earnings are paid back as a dividend.
On an annual basis, the current dividend of 70 cents per share is not enormous. But it’s most likely reliable. And that’s something that shouldn’t be dismissed if you’re an investor looking for something certain.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
