HP Earnings to Be Overshadowed by Split: What Wall Street's Saying

NEW YORK (TheStreet) –– HP (HPQ) reports fourth-quarter earnings after the close and while much of the conference call will center on talk about the company's proposed split, fourth-quarter results will show whether CEO's Meg Whitman turnaround plan for the combined company is actually working.

In the company's fiscal third quarter, Personal Systems (the company's PC business) revenue was up 12% from a year earlier to $8.6 billion, as both commercial and consumer segments rose 14% and 8%, respectively. However, Whitman cautioned that the growth is coming from a flat to declining PC market, indicating the company is taking share.

In October, HP and Whitman announced the company would split into two companies -- Hewlett-Packard Enterprise, to be led by Whitman (who will also be on the board) and chaired by Pat Russo, will focus on servers, storage, networking, services and software. HP Inc. will include the Personal Systems Group, as well as Printing, which includes the company's 3-D printing initiatives.

Yet, revenue outside of the Personal Systems Group fell year over year, declining 3%, underlying the fact that there are still structural issues at HP that must be corrected. Goldman Sachs expects the margins on the Printing business to fall, down from 19.5% in the fiscal third quarter. The strength in the company's PC business, which has been aided by the ending of Microsoft MSFT Windows XP support, but that benefit may start to subside.

"On PCs, the waning commercial refresh will likely weigh on PSG results in the October quarter as we forecast that yoy revenue growth will decelerate to 4.1% from 11.8% in 3QFY2014," analyst Bill Shope wrote in the note. "While we believe HP is gaining share in the near term, we expect industry-driven pressure to build on a go-forward basis, which is built into our FY2015 PSG revenue growth estimate of -3.4%."

For the fourth quarter, analysts surveyed by Thomson Reuters are expecting HP to earn $1.06 a share on $28.76 billion in revenue. Following the announcement of the split, HP reaffirmed its non-GAAP earnings outlook of $3.70 to $3.74 a share, and updated its fiscal 2014 GAAP earnings outlook to be between $2.60 and $2.64 a share. For fiscal 2015, it expects non-GAAP earnings to be between $3.83 and $4.03 a share, and GAAP earnings to be between $3.23 and $3.43 a share.

Going into the report, analysts were cautiously positive on the company's near-term future while waiting for clarity on the proposed split of the company. Here's what a few of them had to say:

Goldman Sachs analyst Bill Shope (Neutral, $36 PT)

"Hewlett-Packard reports fiscal fourth quarter results on Tuesday, November 25, after the market close. For the quarter, our revenue and EPS estimates of $28.7bn (-1.6% yoy) and $1.07 compare to consensus of $28.8bn and $1.06. Looking ahead to the January quarter, we are forecasting revenues and EPS of $27.0bn (-4.0% yoy) and $0.94 (consensus of $27.6bn and $0.93), and for FY2015 we are looking for revenues of $108.5bn (-2.9% yoy) and EPS of $3.96 (consensus of $110.4bn and $3.94).

We do not expect this quarter's earnings to be a significant catalyst for shares, as we expect an in-line print following management's reiteration of FY2014 (and implied 4Q) guidance in early October. With that said, results will have important implications for the wider industry, with reads on PCs and x86 servers as well as the broader IT demand environment."

Deutsche Bank analyst Sherri Scribner (Buy, $45 PT)

"Given recent cautious data points on PC demand in the Dec Q, we expect investors to focus on HPQ's view of PC demand into year-end and into C1Q-15. HPQ's PC segment has seen surprisingly good growth, given industry unit declines, driven by the company's share gains and mix to higher ASP and profit segments. The company also announced its 3D printing technology, called Multi Jet Fusion (MJF) at the end of October, and we expect further detail on HPQ's competitive advantage in this segment, although products will
not be out until 2016. We also expect trends in the Enterprise segment to be an area of focus as well as the company's M&A strategy."

Credit Suisse analyst Kulbinder Garcha (Outperform, $45 PT)

"We forecast F4Q14 revenues of $29.4bn (+0.8% y/y, 6.4% q/q) and EPS of $1.07 vs. consensus of $28.8bn/$1.06. The company continues to face fundamental headwind in anemic IT spend, the transition to cloud and weak PC's. HP's transformation
remains a work in progress and it remains uncertain whether the company can return to meaningful growth. Nevertheless, we see the business as becoming increasingly stable with significant scope for cash return, conservative EPS, and a compelling valuation that should catalyze as we approach separation. Maintain our Outperform and $45 TP."

Wells Fargo analyst Maynard Um (Outperform, $39-$41 PT)

"HPQ reports on 11/25 after market close. We forecast EPS of $1.07 (Street: $1.05; EPS Guide: $1.03-1.07) and rev of $28.6B largely in line with the Street's $28.8B. We expect HP to benefit from the continued stability in the PC & server market and an overall improvement in enterprise IT demand. We expect solid cash flows driven, in part, by PC strength. Looking ahead, we expect HP to reiterate its FY15 EPS guide of $3.83-4.03 (Street/Wells Fargo: $3.95) set in early Oct. We will be looking for further detail on the split
(mgmt in charge of the split now in place), incremental synergy opportunities, and color on potential M&A and divestitures. We believe a split would unlock shareholder value and there could be potential cost savings from further streamlining of operations. We note that average 1-yr and 2-yr return post-split for companies we examined was 14% and 15%, respectively, and with the stock trading at 8.6x FY2015E FCF, we see value and reiterate our Outperform rating."

-- Written by Chris Ciaccia in New York

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