Why We Maintain Our $27 Price Estimate For HP

by Trefis Team
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HP Inc. (NYSE:HPQ) has had a positive year thus far, with robust revenue growth across segments. Through the course of the current fiscal year, HP’s net revenues have increased 13% on a y-o-y basis to $43 billion for the combined nine-month period ended July. Growth came roughly evenly from both the Personal Systems (+14%) as well as Printing (+12%) segments. While Personal Systems revenues saw double digit growth through fiscal 2017 as well, Printing revenues have picked up this year after a modest 3% growth last year. We expect the trend to continue through the end of the year, with revenues and corresponding margins increasing at a steady pace.

Based on market trends and company guidance, we have created an interactive results forecast dashboard for HP that highlights our expectations for the company’s full year results. Based on the expected results, we have a near-term valuation of $27 per share for the company’s stock, which is nearly 15% ahead of the current market price. You can modify drivers such as segment revenues and margin figures to see how the company’s expected results can impact its valuation.

Key Growth Drivers

The company’s continued focus on the consumer market has helped drive Personal System revenues over the last few years. Personal Systems revenues include revenues from notebooks, desktops and workstations. Through the previous fiscal year, HP reported a strong increase in notebook (+16%) and workstation (10%) revenues due to strong demand for Spectre x360 and the new line of Omen X gaming laptops. Consequently, combined Personal Systems revenues increased 11% to $33.3 billion. On the other hand, desktop revenues were up only 3% to offset that growth. However, the company has reported a double digit growth across all three sub-segments this year, which was attributable to a product refresh across premium categories including the Elite and ENVY brands. For the current year, we expect HP’s combined Personal Systems revenues to stand at over $38 billion, or 14% higher on a y-o-y basis.

On the other hand, Printing revenues were up only 3% to $18.8 billion last year. While this is low, it should be noted that it was an improvement over FY’16 when the company reported a 14% decline. And the improvement has continued this year, with a 12% increase in revenues through the first three quarters to $15.5 billion. This trend should continue through the end of the current fiscal year.  In addition, we forecast HP’s adjusted operating margin to be roughly flat over the prior year period at around 8.5%. As a result, we forecast net income to increase in the high teens over FY’18 to $3.31 billion, which is slightly higher than the consensus estimates.

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