Shares of HP Inc. (HPQ) are up 22% year to date. The former Hewlett-Packard will report its third-quarter fiscal year 2016 (ending October) results after the market close on Wednesday. While I think it will be a decent quarter, I would avoid the shares.
HPQ shares have risen this year on optimism surrounding better-then-expected printer performance last quarter. Pricing pressure in the second quarter eased as the yen strengthened, which allowed HP to take market share from its Japanese competitors.
Second-quarter printing revenue was $4.6 billion, down 16%, while the Personal Systems division reported sales of $6.99 billion, a decline of 10%. Total revenue was $11.588 billion, off 11%. However, ex-currency, revenue fell just 5% and that was good enough for investors.
HP's sales have decreased for seven straight quarters, but the second quarter was not as bad as predicted, so investors bought the stock. Revenue bottomed out in the fourth quarter of 2015, with an 8.5% decline.
After the spinoff from Hewlett Packard Enterprise (HPE) , 60% of HP's revenue comes from personal computers and 40% from printing. Of the $1 billion in non-GAAP operating profit last quarter, 77% of the company's came from printing. Printing had an operating margin of 17.3% and is the biggest contributor to HP's profits. Printing supplies (ink) makes up 67% of printing revenue.
Meanwhile, Personal Systems, or the personal computer division, represents 23% of profits and carries a slender 3.5% operating margin. Systems generated a profit of $242 million in the second quarter. The division outperformed the market to achieve an overall market share of 19.4%, up 0.4 points.
The company has become number one in commercial PCs, with a market share of 24.6%. Total unit shipments fell 9% last quarter, however. Desktop revenue declined 13% and units shipped ddropped 10%.
In the second quarter, HP returned $213 million to shareholders in the form of dividends and spent $305 million repurchasing 28.7 million shares.
For the third quarter, management provided earnings guidance of $0.37 to $0.40 per share on revenue of $11.4 billion. Analysts are expecting EPS of $0.41 on revenue of $11.8 billion.
Last month, analysts turned positive on the stock after research firm IDC said HP's calendar-year second-quarter PC shipments rose 5.1% while total revenue declined 4.5%. Investors took that report as a sign the worst for PCs was behind the company.
But while business seems to be improving, the company has seen its best days. Windows 10 hasn't been the big driver of a PC refresh cycle that many expected.
Revenue declined 9% in fiscal 2015 and is estimated to fall 6% this year and 3% next. Revenue was $56.3 billion in fiscal 2014 and this year it is forecasted to be $47.9 billion, or a decline of 15%. And it gets worse. If you look out to fiscal 2018, revenue is projected to be about $45.9 billion, or down 18% from 2014.
I don't see how investors can give the stock a higher multiple when you have to guess if the second quarter will be down less than expected and earnings growth comes almost entirely from share buybacks. There are bigger fish to fry than HPQ.