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HP Inc Still Has Challenges

Hewlett-Packard Company NYSE:HPQ - HP Inc Still Has Challenges

HP Inc HPQ 1.49% reported better headline results but issued weaker-than-expected guidance on continued printer woes, leading BMO to stick with its Market Perform rating on the stock.

For the third quarter, revenue was $11.9 billion, higher than BMO/consensus estimates of $11.3 billion/$11.4 billion. Similarly, EPS was $0.48, above consensus of $0.44, and higher than the previous outlook of $0.43–$0.46.

However, HP took down the high end of the full-year guidance range in anticipation of increased placement of low-margin printer hardware, with the expectation that this will drive supply sales in later quarters.

"We remain on the sidelines given the headwinds in both end markets," analyst Tim Long wrote in a note.

On the PC front, sales were flat with last year. But, HP gained 180 bps of market share, owing to strong demand for gaming PCs and Chromebooks alike. However, the analyst remains concerned that the broader market continues to decline and revenue growth is going to remain firmly negative.

On the printer front, revenue fell 14 percent to $4.4 billion. The company is using the opportunity to place more low-margin hardware, with expectations of driving supply sales in FY17 and beyond.

"However, we remain concerned that Japanese vendors will continue to be aggressive on pricing despite the stronger Yen, slowing HP's opportunity to place units," Long noted.

For the fourth quarter, HP expects EPS of $0.34–$0.37 versus the consensus estimate of $0.41. Accordingly, for full-year FY2016, HP lowered the high end of the range and now expects non-GAAP EPS of $1.59–$1.62 versus BMO/consensus estimates of $1.59/$1.61.

In printing, management expects revenue headwinds to continue but year-over-year declines to moderate. Supplies revenue will continue to decline, but management still expects constant-currency stabilization by the end of FY17.

Long raised his price target by $1 to $13 on the stock, which closed Wednesday's trading at $14.40. In the pre-market hours Thursday, they dropped 5.83 percent to $13.56. At time of publication, HP was down 1.53 percent on the day at $14.17.

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