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Oct 4, 2019

HP tumbles as analysts see 'turbulence ahead' with restructuring

HP shares sink as it announces mass layoffs


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HP Inc. shares tumbled to their lowest level in more than two years on Friday after the company announced a broad restructuring designed to cut costs and boost sales growth. It will cut as much as 16 per cent of its workforce in the reorganization, which will cost US$1 billion.

The personal computer company also gave a forecast for its adjusted 2020 earnings, and both boosted its stock buyback program and lifted its dividend.

Analysts were cautious about the news, with Citi forecasting “turbulence ahead” for the stock. While Wells Fargo wrote that some of the changes were “largely unavoidable,” Loop Capital Markets was surprised by the breadth of the plan, and lowered its view on the stock to hold. Many firms wrote that there was elevated execution risk as a result of the restructuring.

The stock fell as much as 9.4 per cent and was trading at its lowest since February 2017. HP has already dropped more than 36 per cent from a peak in October 2018.

Here’s what analysts are saying about the announcement:

Loop Capital Markets, Ananda Baruah

Downgrades the stock to hold from buy and cuts price target to $19 from $21.

“The breadth and depth of this plan was unexpected,” and there is now “reduced visibility” to the company’s printing business “given new structural and restructuring initiatives.”

It is “very realistic” that operating margins decline, and “our experience is it can be challenging for a stock to appreciate if OMs are declining.”

Morgan Stanley, Katy Huberty

This was a “bold” strategy, but “many of the announced changes will take multiple quarters - and some years - to implement, and come with considerable risks.”

Investors are “unlikely to gain greater confidence” in the stock until they get signs that the strategy is beginning to bear fruit.

Equal-weight rating, price target lowered by $1 to $20. Calls the valuation attractive.

Citi, Jim Suva

There will be “turbulence ahead” given the announcements, which featured positive news on profit growth and innovations, along with negatives in the restructuring.

The job cuts represent “largest workforce reduction by HP since its separation in 2015 and this could be a distraction for the company.”

Affirms neutral rating and $20 price target.

Wells Fargo Securities, Aaron Rakers

Changes to HP’s printing business were “largely unavoidable,” but “investors will view HP’s capitulation as net-negative.”

There is “growing execution risk associated with HP’s realignment of its printing businessand simultaneous cost-cutting efforts.”

Market-perform rating, $20 price target.

What Bloomberg Intelligence Says:

“HP can still generate considerable cash in the near term, but this will require meaningful emphasis on cost cutting and may not be sustainable.”

- Analyst Robert Schiffman