Despite a 33% rise since its low in March, at the current price of $17 per share we believe HP Inc. stock (NYSE: HPQ) has reached its near term potential. HP stock has rallied from $13 to $17 off the recent bottom compared to the S&P which moved 38%. Further, HP’s stock is down about 17% from levels seen in early 2018, a little over 2 years ago.
HP stock has recovered only halfway to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Regardless, this seems to make it appear fully valued as, in reality, demand and revenues will likely be slightly lower than last year.
This drop over the last 2 years came despite a 13% growth seen in HP’s revenues from 2017 to 2019, which translated into a 25% growth in Net Income (earnings margin grew 11%). This combined with a 10% drop in outstanding share count, led to a 39% rise in earnings on a per share basis.
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Its PE multiple has seen a 40% drop over this period, due to lower printer and computing device demand worldwide, and a drop in HP’s share in the computing device market. Further, we believe the stock is unlikely to see significant upside despite the recent rally, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove -17% Change in HP Inc. Stock between 2017 and now? has the underlying numbers.
HP’s PE multiple has changed from 14x in 2017 to 10x in 2019. While the company’s PE is now roughly 8.5x, there is additional possible downside when the current PE is compared to levels seen in the past years: PE of 7x in 2016 and 6x as recently as late 2018.
So what’s the likely trigger and timing for this downside?
The global spread of Coronavirus has meant there is much lower demand for computing devices across all markets, which means lower demand for HP’s products. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe HP’s Q3 results in July will confirm the hit to its revenue. It is also likely to accompany a lower Q4 as-well-as 2020 guidance.
If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline from the current level of 8.5x to 7x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $14.
While HP stock doesn’t seem to have much near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That Could Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.
Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here.