Hewlett-Packard Remains A Victim Of Secular Headwinds

| About: HP Inc. (HPQ)
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Earnings results met expectations.

Long-term trends dictate declining sales.

The business has non-performing segments in key markets, and therefore, I continue to reiterate my negative stance on the company.

The stock currently exceeds my $35.24 price target, and it's unlikely to outperform the sector/S&P 500 going forward.

Hewlett-Packard (NYSE:HPQ) reported fairly solid earnings results, which was driven by server and PC refresh. The growth this past fiscal year may be limited, as the market for system hardware is shrinking, and quarterly improvements will do little to diminish the long-term trend in revenue declines.

In an earlier article, I mentioned cloud would be a significant downside catalyst going forward:

We're seeing some growth in Hewlett-Packard's PC segment; it just wasn't enough to offset the declining enterprise business. Many are advising people to get rid of their legacy Windows XP OS, but stubborn as they are, some people don't want to migrate to newer operating systems. Even if they did migrate to a newer operating system, the temporary boost in sales doesn't explain where Hewlett-Packard is going to go over the next five years.

The CEO does little to diminish my concerns over HP's shrinking market in both desktop/laptop PCs and server hardware. As Meg Whitman mentions that she's hoping to offset the shrinking consumer PC market through market share gains:

In personal systems we had an excellent performance, with revenue up 12% from the prior year period. This represents the third successive quarter of revenue growth for personal systems in a market that has stabilized, but nevertheless, continues to contract. We gained market share both year-over-year and sequentially, and we're seeing growth across all major categories.

Source: Hewlett-Packard

Hewlett-Packard reported a modest y-o-y decline on earnings, from a GAAP basis, but on a non-GAAP basis, the company reported growth in earnings, as restructuring charges resulted in the y-o-y decline on earnings even as sales have grown by 1.3%. The growth in earnings surprised analysts somewhat.

Source: Hewlett-Packard

The outlook isn't that bad, the non-GAAP range is $3.70-$3.74; I'm assuming the company will report at the higher end of the range as the company has had a consistent history of reporting earnings that beat analyst expectations.

Source: Yahoo! Finance

The growth prospects aren't very compelling, as the enterprise business, and the software business report declines, even as PC and server get a modest boost from stabilization.

Source: Hewlett-Packard

The company reported a 6% y-o-y decline in enterprise services. This is what leaves me skeptical of HP's cloud efforts. Infrastructure as a service is expected to be one of the faster growing cloud categories, but in the case of Hewlett-Packard, the category is not even growing, it's contracting.

Source: Hewlett-Packard

However, the software side of the business didn't generate meaningful revenue growth either. The market for consumer PCs and server-class computers will continue to shrink. In a shrinking market, the company's other services like cloud, and software should be growing, but instead they're contracting.

I forecast Non-GAAP EPS of $3.74, and a GAAP EPS of $2.79. I believe the stock will trade at 12.63 times GAAP earnings; therefore, my price target is $35.24. The stock has hardly any upside from current levels as it already trades above my target price of $37.15.

I am compelled to say that Hewlett-Packard doesn't carry the growth prospects that I typically demand from a business. The stock is above my price target, therefore I cannot recommend HPQ. At the present growth trajectory, it's likely that Hewlett-Packard will underperform the tech sector and the S&P 500 over the next five years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.