HP Inc.: PC Data Foreshadows Another Strong Quarter

| About: HP Inc. (HPQ)

Summary

IDC has reported its quarterly PC sales data for Q1, and while it estimates that shipments were flat, HP's shipments actually grew.

HP grew PC shipments by 4% y/y, maintaining its #1 market share with 22.6% of the market in Q1.

This is HP's eighth consecutive quarter of growth in a PC market that has largely been down or flat.

The market share gap between HP and #2 Lenovo has widened to 220 bps, up significantly from 130 bps last quarter.

Shares remain cheaply valued at 11x forward P/E, especially for a company expecting to see ~20% earnings growth this year.

Every quarter, the research powerhouse IDC publishes data on unit shipments in the PC industry. And for the past few quarters, the message has been largely the same: HP Inc. (HPQ), the PC and printer spinoff of the original Hewlett Packard companies, continues to grow in what has been a stagnant market for years.

As a refresher, HP's printer business is responsible for about two-thirds of the company's revenue, and about one-thirds of the company's operating profits (its high-margin printing and supplies business still makes up the lion's share of the company's bottom line). As such, investors should pay close attention to the bullish signals coming out of the IDC data.

IDC's data covers the first calendar quarter of the year (January through March), which isn't perfectly aligned with HP's fiscal quarters (its Q2 runs from February to April). However, IDC's shipment estimates are usually very good proxies for the growth that HP eventually reports in the coming quarter. Last quarter, IDC estimated 8% y/y shipment growth for HP in the fourth calendar quarter of 2017, while HP ended up reporting 7% y/y unit growth in its fiscal first quarter.

HP is due to report earnings some time in Mid-May, and this data further reinforces the HP bull thesis. Shares have traded roughly flat this year, only slightly outperforming the broader S&P 500.

Chart HPQ data by YCharts

At just under $22, HP Inc. is a relative steal. Analysts, as reported by Yahoo Finance, are expecting the PC giant to report $1.97 in EPS this year, up from $1.65 last year. That's 20% EPS growth, much more than most companies can claim and a robust performance for a company that's in a supposedly stagnating industry. Essentially, this stock can be had at a forward P/E ratio of less than 11x. I continue to believe that HP deserves at least a market-average earnings multiple (16x), implying a price target of $31.50 (45% upside from current levels). With the PC industry levelling off and showing stability this year, fears of earnings compression are far overblown, and HP has time and again proven itself to be a steadfast performer.

IDC data: 7% growth for HP versus 0% for the broader PC market

IDC reports that total PC shipments in the first calendar quarter of the year were 60.38 million, and that's roughly flat year over year. This is essentially the same story as in the fourth quarter of 2017, where the research firm reported just 0.7% y/y growth for the full quarter despite an uptick in holiday sales. The overall PC market also beat IDC's prior forecast for -1.5% decline in Q1, a huge bullish indicator for HP and other PC makers.

One note here: another research firm, Gartner, also puts out its own PC shipments data. It is more inclusive in its dataset, reporting 61.69 million unit sales in 2018, but reported -1.4% y/y decline on that figure. We'll focus on the IDC data here as it's the more commonly cited source, but note that Gartner is also showing similar growth for HP's unit sales.

There's a lot of meat in the IDC data, drilling down into regional breakouts, but let's focus first on how HP fared against the top three vendors:

Source: International Data Corporation

HP is estimated to have grown its unit shipments by 4.3% in calendar Q1 (Gartner says 2.8%, for comparison's sake), far outpacing the rest of the PC market. Dell is creeping ahead with 6.4% growth in the quarter, but HP still maintains a comfortable market share lead against the private Texas-based PC maker.

Note also that HP's share gains have widened against #2 Lenovo, which IDC estimates to have 20.4% market share in Q1 shipments. That's 220 bps lower than HP's market share, a widening spread versus the 130 bps of difference in the 4Q17 data. Just as recently as 2016, it was Lenovo that was the #1 PC maker, and HP has only recently leapt ahead of the Chinese giant. And HP continues to take more share, increasing its market share by 90 bps this quarter as noted in the chart above. This is HP's eighth consecutive quarter of PC growth, amid a market that has seen rather flat performance for years - there can't be a more bullish signal for HP than that.

From a total market perspective, IDC's researchers cite positive momentum in the commercial sector, with Windows 10 driving a lot of hardware replacements and benefiting the Windows heavyweights like HP. The firm sees "modest commercial momentum through 2020." It also called out strong performance on the notebook side, with the U.S. returning to modest growth after six quarters of decline.

Unit growth compounds with ASP growth

With roughly 4% of unit growth essentially expected for HP's second quarter PC segment results, we should also keep in mind that HP has also enjoyed ASP growth. HP doesn't explicitly report average selling prices in the quarter, but in Q4 it reported 15% revenue growth for its PC division atop 7% unit growth, implying that stronger ASPs made up for the difference.

If ASP growth trends continue into the second quarter, we should see north of 10% revenue growth for HP's PC division as a whole. Of course, the total company results that investors care about also rely on the performance of the printing division, but in recent quarters, the PC and printing divisions have seen very similar rates of top-line growth.

Wall Street analysts have a consensus revenue target of $13.57 billion for HP's fiscal second quarter, up 9.5% y/y. If the printing segment continues its growth momentum (last quarter saw 13% growth) and PC ASPs also continue their recent strength, a top-line beat in Q2 is virtually guaranteed.

HP's multi-segmented PC strategy has worked wonders for the company. Unlike its closest competitor Lenovo which is popular mostly with lower-end buyers, HP has well-recognized high end brands to complement its portfolio of cheaper brands. On the consumer side, HP's premium brand is HP Spectre; on the business side, it's HP Elitebook. These premium units have not only been responsible for helping HP gain share against Lenovo, they've also helped the company to tick up its ASPs as well.

Final thoughts

HP Inc. got caught up in the broad market selloffs in March and April along with the rest of the technology sector, but the stock has barely moved an inch after IDC reported its bullish PC data on April 11.

Investors have a timely chance now to buy HP shares in anticipation of a good showing in the fiscal second quarter. Last quarter, HP also beat expectations and saw an 8% jump in the stock. Of course, we have to bear in mind that while the PC segment is responsible for the majority of the top line, the fate of the bottom line largely lies in the performance of the printing segment, which we have limited visibility into - sadly, the printer market doesn't get as much attention from research firms as PCs do.

Given HP's recent strength, however, it's a fairly safe bullish bet, especially at a bargain-basement 11x forward P/E.

Disclosure: I am/we are long HPQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.