HP Shares Decline as BofA Downgrades to Neutral Amid Print Margin Reversal

HP Inc. experienced a decline in pre-market trading following a downgrade from Bank of America, which lowered its rating from Buy to Neutral. This change was driven by the expectation that the company’s earnings per share (EPS) growth will primarily result from share buybacks.

The analysts maintained a price target of $37, based on a 10x multiple of the projected EPS of $3.55 for the calendar year 2025.

The downgrade reflects Bank of America’s assessment that while there may be potential benefits from advancements in AI-powered PCs, these will likely be offset by decreasing profit margins in the printing sector. Despite HP’s strong performance in the printing division, the analysts foresee a return of print margins to the midpoint of the long-term range.

The firm predicts a decline in print revenue from fiscal years 2024 to 2026, estimating an 18% operating margin in this segment, which still exceeds the average over the past 14 years. Analysts warn that further declines in print margins could exert additional pressure on earnings, noting that prior improvements were likely temporary, influenced by cost reductions and supply chain challenges related to COVID-19.

Additionally, Bank of America anticipates that HP’s free cash flow (FCF) will stabilize around $3.5 billion in the short term, with an expected $3.2 billion by the end of fiscal year 2024. While this figure aligns with HP’s guidance, it is projected to be skewed toward the latter half of the year.

The bank pointed out that, although growth in the PC sector could provide some positive contribution, it is unlikely to be enough to significantly enhance overall FCF growth due to ongoing challenges in the printing sector.

Bank of America also identified several risks that could affect its outlook, including a stronger cycle of PC upgrades, unexpected increases in FCF driven by operational improvements, additional savings from restructuring efforts, currency fluctuations favoring Japanese competitors, increased enterprise spending resulting from improved macroeconomic conditions, and strategic initiatives under the leadership of the newly appointed CFO, Karen Parkhill.