announced a flurry of news late Tuesday that requires sorting out–and at least for the moment, investor enthusiasm for a new round of cost-cutting is outweighing worries about continued weakness in the PC and printer business and a slowing pace of stock buybacks.
In pre-market trading, HP shares were up 3% to $30.26.
HP (ticker: HPQ) posted sales and profits for the quarter ended in October that were a smidge above Street estimates, but with ongoing weakness in both PC and printer demand. Sales in the quarter were off 11%, or 8% adjusted for foreign exchange headwinds.
Guidance for both the first quarter and the October 2023 fiscal year came in shy of estimates, with HP projecting that industry-wide PC unit sales will decline 10% in 2023, with printer revenues expected to drop 3%.
HP has been aggressively buying back stock in recent quarters. It bought back $4.3 billion of stock in fiscal 2023–and in reporting results the company said it remains committed to returning 100% of free cash flow in the form of dividends and stock buybacks.
But HP also said it will slow the pace of repurchases in the first half of the new fiscal year following the company’s recent acquisition of the headset and conference phone company Poly, which required the company to take on some additional debt.
HP also announced a 5% dividend hike. The stock yields about 3.4%.
Investors appear most focused on the company’s plan to cut between 4,000 and 6,000 jobs over the next three years, part of a program to reduce annual run-rate expenses by about $1.4 billion. Including the recent Poly acquisition, the company has just over 61,000 employees.
CEO Enrique Lores told Barron’s in an interview Tuesday that about 40% of the job cuts would come in 2023, with the rest evenly divided between the following two years. It’s worth noting that the new restructuring plan follows the completion of a previous three-year cost cutting plan that targeted $1 billion in savings.
The news has met with mixed reaction from HP analysts. While generally supportive of the cost cutting program, concerns remain about the outlook for the PC industry, which has suffered a major reversal after the sharp spike in demand during the pandemic, driven by the large number of people working and learning from home. HP said it has cleared out the backlog in the PC segment, and there are worries that the softening outlook could pressure prices.
Jefferies analyst Kyle McNealy keeps his Hold rating on the stock, while trimming his target price to $27.50 from $29.50.
“Not surprisingly, HP continues to get impacted by a softer macro environment,” he writes. “We remain concerned about the durability of HP’s operating margins, as demand softens and pricing/competition become bigger factors.”
‘s Krish Sankar strikes a common theme in the flurry of research notes Wednesday – to buy the stock, you have to believe that things are going to get better in the 2023 second half and into 2024 as the cost-cutting kicks in. He says the cost cuts are a positive for fiscal 2024 and 2025, but cautions that 2023 will be a struggle, as lower PC demand combines with reduced stock buybacks. He keeps his Market Perform rating and $30 target price.
Evercore’s Amit Daryanani takes a similar stance. He thinks the fiscal 2023 will be “rather challenging,” but adds that the company is taking the right steps to ensure they can defend margins and profits despite a weaker revenue environment. He thinks the the stock “could set up rather attractively” for the fiscal 2023 second half and beyond, but adds that for now he is sticking with his In Line rating and $33 target.
Barclays analyst Tim Long keeps his Underweight rating on HP shares, while trimming his target price to $24, from $27. Long cautions that the weak PC market has begun to impact average selling prices. He notes that price promotions are picking up, with lower demand and higher inventory, which he contends will likely lead to declining prices from here. “We question the durability of price and margins across PCs and print, particularly as macro pressures weigh,” Long writes.
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