HP (HPQ 0.80%) The company posted its most recent quarterly report on November 22. The revenue of the PC and printer manufacturer declined 11% year over the previous year to $14.8 Billion, but still beat analysts’ estimates by $120 Million. The adjusted earnings fell 10% to $0.85 per sy, but still beat analysts’ estimates by one penny.
HP did not provide any top-line guidance. However, it expected its adjusted EPS to decrease 27%-36% year-over year in the first quarter fiscal 2023 and slide 12%-22% for full year. Both estimates fell short of Wall Street’s expectations. They indicated that the post-pandemic slowdown of the PC market will continue at least for a few more quarters.
HP unveiled a “Future Ready Transformation Plan”, which seeks to streamline the company’s operations by fiscal 2025. Could this plan bring new life to its stock over three years?
What is HP’s Future Ready Transformation Plan and Why?
Enrique Lores, CEO of the company, stated that the Future Ready Transformation plan would result in significant savings through its “digital transform, portfolio optimization and operational efficiency” strategies.
Lores anticipates that the company’s digital transformation will improve its “speed and quality”, “supply chain, customer service, 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 believes that HP will optimize its portfolio by focusing on those businesses that can provide significant competitive advantage and market leadership as it reduces 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 fiscal 2025. This is due to “driving efficiencies”, simplifying its organizational structure and eliminating unneeded costs. HP intends to trim its workforce by 4,000-6000 (7%-10% its current workforce) before the end of fiscal 2025.
HP expects to spend $1.0 billion on restructuring over the next 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. It will likely experience a slowdown in fiscal 2023. HP’s revenue has been declining year-over year for two consecutive quarters. Its growth will not accelerate anytime 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 projects that tablet and PC sales will fall 2.6% by 2023, before recovering 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 isn’t just a soft market for PCs. The long upgrade times, paperless offices and the competition from generic toner and ink suppliers will all continue to hamper HP’s printing business. 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.
In the future, HP’s fiscal 2023 is likely to be marked by declining revenue and aggressive cost cutting measures. It is possible that its revenue will grow again in the low single digits over the next two years (assuming the printing and PC markets stabilize under milder macro headwinds), while its adjusted earnings per share might rise by the double digits as savings kick in.
In three years, where will HP’s stock stand?
HP shares trade at $30 per share. This is just nine times its adjusted EPS forecast for fiscal 202023. It just increased its annual dividend to $1.05 per shared, which is a 3.5% forward yield. 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 as investors shift to higher-growth stocks.
Accordingly, HP’s stock may remain stable or slightly rise over the next three-years, but it will likely still underperform the market. Although the “Future Ready” plan is a positive step, it’s not as appealing as other blue tech stocks such as Cisco (CSCO -0.35%) Superior revenue growth and earnings growth are achieved while paying comparable dividends.