GVA Research on CNBC Asia: HPQ has 20% downside risk

Hewlett-Packard Co. (H-P) on Nov. 1 split into two companies–Hewlett-Packard Inc. (HPQ), which took the PC and printer business, and Hewlett Packard Enterprise (HPE), which is a business computer and software vendor. Before its legal split, the company divided itself operationally on Aug. 1. HPQ and HPE, which formally split in two this month. This¬†evening they announced a joint fiscal Q4 report for the three months ending in Oct. 31, which gave results for the combined company pre-split, showing revenue and profit below consensus.

As a combined company for the quarter ended Oct. 31, H-P said revenue fell -9.5% to $25.7bn, -4% below the Street consensus of $26.72bn. Among the larger HPQ segments, revenue for notebooks declined -10% to $4.38bn and desktop revenue dropped -21% to $2.53bn. Overall, revenue in the printing and personal systems group was down -14% to $12.66bn. On a per-share basis, reported EPS of $0.73 compared with the prior year period EPS of $0.71. Excluding non-recurring items, operating EPS of $0.93 was $0.04 worse than the $0.97 consensus.

Bottom line: HPQ is in a difficult spot facing privately held competitor DELL, so expect downward pressure on the shares. Investors should expect a test of the 9/29/15 $11.03 low share price level. It will be tough for the shares to appreciate substantially until the expense base is in line with revenue declines. Long term, shrinking one’s way to profitability is a recipe for survival, but not a formula for success. Meanwhile, expectations HPQ will benefit from an upgrade cycle on the installed base of 450mm desktops more than 4 years old are likely misplaced as consumers have shifted their form factor preference to hand-held devices (i.e. smartphones), a market from which HPQ is notably absent. Separately, against a backdrop of accelerating innovation leading to shorter product cycles which result in a briefer window of opportunity in which to recover development costs, HPE as a legacy enterprise IT vendor needs to reposition itself to address unfolding disruptive trends (see below). In our view, HPE shares hard pressed to exceed $15 level near term.
Credit Suisse Structure conference takeaways, November 24th, 2015.