Don’t Bet on HP Inc Reaching New Highs

HP Inc shows results, but profit is limited

Shares of HP Inc (NYSE: HPQ) popped up in the second quarter earnings report tickling a new record, but we’re not betting on a breakthrough. While the news is good and the outlook favourable, there are some underlying conditions in the market that are limiting our gains, at least in the summer. The largest is institutional activity. Institutions have been net sellers in recent quarters and their activity picked up in the second quarter. Last year’s net sales value is close to $2 billion worth of stock or about 4.8% of its current market cap, so not a small amount. Since the institutions own nearly 82% of the stock, they represent a significant headwind for stock prices if this trend continues. – MarketBeat

The other factor is the analysts. The 12 analysts who rate the stock are holding it on Hold and sentiment is not solidifying. While the post-release activity includes 2 price target upgrades from 2 analysts, the consensus target is flat over the past 30 and 90 day periods and about 8% below current price action. The conclusion from the analysts’ chatter is that things are looking good now, but there is a risk of market share loss for Dell after the strong quarter and the possibility of shrinking margins.

HP Inc defeats and increases on-demand power

HP Inc had a good quarter with growth in key segments offsetting weakness in others. The company brought in $16.5 billion in net sales for a 3.8% gain from last year, beating the consensus by 190 basis points. The core Personal Systems segment grew 9% and was offset by a 7% contraction in printing that we associate with going back to work and children going back to school. People still need computers, but there is much less need for printers, ink and related items.

The company was able to contain inflationary pressures, which is good news, and lost just 30 basis points in adjusted operating margin from last year. The bad news is that the margin decline offset earnings power and operating profit was flat year on year. The good news is that margin was better than expected, helped by share buybacks, leading to adjusted EPS growth of 16% YOY. Adjusted EPS also outperformed consensus and led to an increase in guidance, but in our view it is not enough to push stocks to higher price levels. The company raised the lower end of its projected range for both Q2 and full-year 2022 earnings, but the outlook is still in line with consensus and there is plenty of risk in the economic forecast.

HP Inc Returns $1.3 Billion to Shareholders

HP Inc is a solid dividend payer despite its ho-hum status as a technology stock. The company pays more than 2.5% with shares trading near $40 and has a positive outlook for distribution growth. The company has increased its dividend at a 5-year CAGR of more than 11.5% for the past 11 consecutive years and is distributing less than 25% of its profits. Based on earnings and balance sheet, we think this company can at least continue to increase its dividend in the coming years.

The Technical Outlook: HP Inc Leads the Way

Shares of HP Inc jumped in the wake of the earnings report and could move higher, but at this level they are more than 200% above the pandemic floor, tickling resistance at the current all-time high. In our view, with institutions selling and not helping the analysts either, this will become a ceiling in price action that dampens gains in the coming weeks, if not months.
Don't Bet on HP Inc Reaching New Highs

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