Investing.com -- Shares in HP Inc. (NYSE: NYSE:HPQ) fell in the market pre-open Friday after analysts at Bank of America cut their rating on the stock from Buy to Neutral. The move comes as analysts expect HP’s earnings per share (EPS) growth to “come purely from share buybacks.”
They maintained a price target of $37, anchored by a 10x multiple of its projected calendar year 2025 EPS of $3.55.
The downgrade reflects BofA's analysis that potential gains from the PC sector, including advancements in AI-powered PCs, will likely be counterbalanced by diminishing print margins.
HP has reportedly been overachieving in its printing segment, and BofA anticipates a reversion of print margins to the middle of their long-term range.
The firm projects a decline in print revenue over fiscal years 2024 through 2026, with an 18% print operating margin that exceeds the 14-year average.
“Any further downside to print margins could increase pressure on earnings,” analysts caution. “Cost takeouts and COVID-related supply chain issues created a transitory higher margin environment in Printing that is not sustainable, in our view.”
BofA also forecasts that HP's free cash flow (FCF) will plateau at approximately $3.5 billion in the near term. The projection for the end of FY24 is $3.2 billion, which falls within HP's guidance range but is expected to be heavily weighted towards the second half of the year.
The bank suggests that while PC growth could contribute positively, it will not be sufficient to significantly boost overall FCF growth due to the headwinds in the printing sector.
BofA highlighted several risks that could impact its thesis, including a stronger PC refresh cycle, higher-than-expected FCF from operational profit growth and cost management, additional savings from further restructuring, currency fluctuations benefiting Japanese competitors, an uptick in enterprise spending due to better macroeconomic conditions, and strategic changes under the direction of the newly appointed CFO Karen Parkhill.