HP (HPQ 0.80%) On Nov. 22, the company published its quarterly report. The revenue of the PC and printer manufacturer declined 11% year-over year to $14.8 Billion, but still beat analysts’ estimates of $120 M. The adjusted earnings fell 10% to $0.85 per sy, but still beat analysts’ estimates by one penny.
HP didn’t give any top-line guidance. But it expects that its adjusted earnings per share will shrink by 27%-36% in the first quarter and slide 12%-22% over the entire year. These estimates were lower than Wall Street’s expectations, and suggested that the post-pandemic slowdown in the PC market would continue for at least a few quarters.
HP unveiled a “Future Ready Transformation Plan”, which seeks to streamline the company’s operations by fiscal 2025. Could this ambitious plan give life to HP’s stock in the next three-years?
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What is HP’s Future Ready Transformation Plan and Why?
Enrique Lores, CEO, said that the Future Ready Transformation plan would help the company make significant savings through “digital transformation”, portfolio optimization, operational efficiency, and other strategies.
Lores believes that digitization will enable the company to transform its digital business. He expects it to increase the “speed” and “quality” of its supply chain, customer support and go-to market strategies. He believes the “new digital backbone will allow HP to scale key growth businesses while increasing its revenue per customer through “more personalized services” and solutions.
Lores predicts that HP will “zero in” on businesses where it can “drive significant market leadership and competitive advantage” as it streamlines its portfolio. Lores anticipates that HP will roll out new products in higher-growth markets like gaming, 3D printing, and hybrid work. However, it will gradually reduce the number of models available for the PC market. Lores also hopes that HP will expand its subscription-based ecosystem, beyond the Instant Ink service. This would include a new platform called “devices as a service” for hybrid workers as well as subscriptions to paper and printing hardware.
Lores predicts that HP will be able to save $1.4B annually in operating costs by 2025. This is due to “driving efficiencies”, simplifying its organizational structure and eliminating unneeded costs. HP intends to trim its headcount by 4,000-6000 (7%-10% its current workforce) before the end of fiscal 2025.
HP anticipates that it will have $1.0 Billion in additional expenses as a result of these restructuring efforts over three years. HP will temporarily reduce its buybacks in order to preserve its balance sheet during that transition.
This sweeping plan will help HP to stabilize its business.
It’s not surprising that HP has plans. But, the company will likely suffer a slowdown during fiscal 2023. The revenue of HP has declined year-over-year for two consecutive quarters and it won’t be growing any time soon. Lores forecast that worldwide PC sales would fall 10% next year, and then return to pre-pandemic levels.
This forecast is a little more grim than those for other industries. IDC, for example, projects that the sales of tablet and PC computers will drop 2.6% in calendar 2023. However, they expect to see growth in 2024. The research firm predicts that the market will expand at a weak CAGR (compound annual rate of growth) of 0.8% between 2022-2026 as the industry recovers from the pandemic.
HP’s problem is not just a weak market for PCs. HP’s printing business will continue to be hampered by long upgrade cycles and paperless offices. There will also be competition from generic ink suppliers and toner suppliers. HP could offset some of this pressure by expanding its metal and 3D printing business. However, most of its printing revenue still comes from the enterprise market and consumers.
The fiscal year 2023 of HP will be defined by declining revenues and aggressive cost-cutting. It is possible that its revenue will grow again in the low single digits over the next two years (assuming that the printing and PC markets stabilise amid milder macro headwinds). However, the adjusted EPS may start to rise by the double digits as savings kick in.
What will HP’s stock look like in three years?
HP shares trade at $30 per share. This is just nine times its adjusted EPS forecast for fiscal 202023. The company also increased its annual dividend by 5%, to $1.05 per shares. This translates into a forward yield at 3.5%. The bear market is dragging on, HP’s downside potential should be limited by its low valuation and high return. The bear market will likely end in three years, so HP’s stock may stagnate until a new bull markets drives investors to higher-growth stocks.
So, while I think HP’s stock will remain stable, or maybe rise slightly in the next three years it will likely continue to underperform its market peers. Although the “Future Ready” plan is a positive step, it is not as appealing as other blue tech stocks such as Cisco (CSCO -0.35%) You generate superior earnings and revenue growth, while also paying comparable dividends.