BUY-rated HP Inc. (NYSE: HPQ) rallied by 3% in a declining market on 3/18/21 after posting results for fiscal 1Q21 that sharply exceeded company guidance and consensus expectations. The company also guided for additional strength in the current fiscal 2Q21, as consumer notebook demand continues unabated and according to some investors HP could really be the best stock to buy.
Fiscal 1Q21 revenue was up 7% annually and topped the consensus by over half a billion dollars. Both personal systems and printing grew in high single digits. With operating margin expanding 100 bps year-over-year, non-GAAP EPS soared by more than 40% against expectations of a flat year-over-year performance.
During the pandemic era, technology categories serving work & learn from home – including notebook PCs & Chromebooks, and consumer printers & supplies – have thrived. Sales into traditional enterprise-driven markets, which were weak throughout calendar 2020, are now showing signs of recovery, albeit uneven.
As higher-margined enterprise desktop PC and commercial printer end markets recover, we look for additional momentum in personal systems and in the printing business.
HP Inc. was the number two global PC producer for the full year of 2020, and the leader in shipments to the U.S. market, according to IDC (which includes Chromebooks in its shipment data). The company is the United States leader in printing, and this business appears to be moving past pre-pandemic challenges in commercial ink resupply.
As consumers, businesses, and institutions adjust to a hybrid model for work, learning, collaboration, and social interactions, HPQ appears well-positioned as personal systems maintain strength and printing continues to recover.
HP Inc. in our view is well positioned for what we see as the new normal, meaning an accelerated digital age in which edge devices such as PCs and printers remain vital to productivity.
Recent Developments
HPQ is up 17% year-to-date in 2021.
For fiscal 1Q21 (ended January 31, 2021), HP Inc. reported revenue of $15.65 billion. HP believes its strong start to the fiscal 2021 year is attributable to the strength of its portfolio and the diversity of its business.
The company translated strong top-line growth into double-digit segment profit growth in both personal systems and printing. HP generated $908 million in free cash flow in the quarter. Notably, at a time when many companies suspended share repurchases, HP Inc. over the past three quarters has returned $4.4 billion to shareholders while repurchasing approximately 13% of its shares.
HP believes the breadth and diversity of its portfolio position the company for success across business cycles, including the current pandemic period. With global economic recovery remaining uneven as vaccines proliferate, HP continues to manage its business in a ‘disciplined and prudent manner while remaining agile in response to shifting market conditions.
HP is focused on executing its strategy of advancing leadership in personal systems and print, expanding into attractive adjacencies, disrupting industries, and creating new opportunities in 3D printing, industrial paint, and microfluidics.
PS profits of $758 million rose by 15% annually and were also up $230 million on a sequential basis as HP adjusted operations to new realities. PS margin expanded by 200 bps annually to 7.1% for 1Q21 from 5.1% for 4Q20 and was also up 40 bps year-over-year from 6.7% for 1Q20.
Despite lower-than-normal enterprise demand for high-end notebook and desktop PCs, PS margin in 1Q21 was the highest in our quarterly model dating back to fiscal 2011, when HP Inc. and Hewlett Packard Enterprise were still one company. PC units overall were up 15% annually in 1Q21, as notebooks and desktops continued their divergent trend from fiscal 2020.
Reflecting the weakness in the traditionally larger commercial category, desktop PC units were down 23% from 1Q20; and desktop PC revenue was down 18% annually. Compared with the traditional 60/30 mix of notebooks to desktops in personal systems (with workstations and others representing the other 10%), notebooks represented 69% of Personal Systems revenue, desktops were just 23%.
Overall, commercial PC revenue was down 12% annually but soared 33% year-over-year. Sub-categories in consumer PC also shined, with revenue up 34% in consumer premium, 29% in gaming PCs, and 22% in consumer accessories. Chromebook revenue quadrupled year-over-year, reflecting no let-up in school-based demand but also general demand growth.
PC sales were gated by component shortages and would have been even stronger in a normal supply environment. HP exited 1Q21 with a record backlog. Looking ahead, HP Inc. anticipates continued demand strength in consumer PCs across 2021, with a gradual recovery in commercial demand as vaccines proliferate and offices reopen.
Supply constraints are expected to remain an issue at least through fiscal 3Q21. In February 2021, HP Inc. acquired HyperX, the market leader in gaming headsets, for $425 million; the deal adds to peripherals and creates another growth engine in personal systems.
Also for 1Q21, printing revenue of $5.04 billion rose 7% in GAAP and in constant currency and was up 2% sequentially on top of 23% sequential growth in 4Q20. Printing profits of $988 million were up 32% annually and $270 million sequentially. The print margin of 19.8% for 1Q21 was up from 14.8% in 4Q20 and 16.0% in 1Q20.
Additionally, component supply constraints extend to print hardware and replacement parts for print services. Printing supplies revenue (62% of print total revenue) rose 3% year-over-year, for the first positive annual comp since 4Q18.
Recovery in online commercial ink resupply has been hurt by weak demand from lightly staffed company offices, although the trend is slowly improving. Mainly, the consumer-driven Instant Ink business is surging, with double-digit growth fueled by more than nine million subscriptions. HP stock added one million Instant Ink subscriptions in 1Q21 alone.
Consumer hardware sales, at the highest-ever 19% of print revenue, were up 55% annually and 22% sequentially. HP continues to expect a gradual recovery in the overall commercial print market, though the pace may be uneven. Expectations for a hardware upgrade cycle in the office environment are mixed.
HP also looks for consumer print to gradually subside as the world enters what is expected to be a new normal. HP is adapting to an anticipated hybrid world with more as-a-service offerings such as HP Flex, designed to help fully and partly remote workers maintain productivity.
HP is also leveraging its leadership in 3D printing in its relatively new molded fiber business, for quickly customized and environmentally sustainable packaging. Full-year FY21 adjusted EPS guidance was way ahead of the pre-reporting consensus, and we expect to see an extended move higher in the shares. HP Inc. in our view is well positioned for what we see as the new normal, meaning an accelerated digital age in which edge devices such as PCs and printers remain vital to productivity.
EARNINGS & GROWTH ANALYSIS
HP reported revenue of $15.65 billion, which was up 7% year-over-year on a GAAP basis and in constant currency. Revenue exceeded the $15.05 billion consensus forecast by $600 million; HPQ does not guide for quarterly or annual revenue.
Non-GAAP earnings for 1Q21 totaled $0.92 per diluted share, which was up 40% year-over-year and $0.30 sequentially. Non-GAAP EPS was way above the high end of management’s guidance range of $0.64-$0.70 per diluted share and beat the $0.66 consensus by $0.26.
For all of fiscal 2021, HP expects non-GAAP EPS to be in the range of $3.15-$3.25. At the $3.20 midpoint, non-GAAP EPS for FY21 would be up 40% year-over-year.
VALUATION
Historical comparables no longer partly reflect the predecessor company Hewlett-Packard Inc., which spun out two companies (HP Inc. and Hewlett Packard Enterprise) over five years ago.
