HP Inc. Stock Rating Downgrade

Investing.com — Shares in HP Inc. (NYSE: HPQ) fell in the pre-market on Friday after analysts at Bank of America downgraded their rating from Buy to Neutral. The downgrade is based on expectations that HP’s earnings per share (EPS) growth will primarily result from share buybacks.

The price target remains at $37, based on a 10x multiple of its anticipated calendar year 2025 EPS of $3.55.

Bank of America’s analysis indicates that potential gains in the PC sector, including advancements in AI-powered PCs, may be offset by declining print margins. HP has excelled in its printing segment, but analysts predict print margins will revert to the long-term average.

The firm forecasts a decline in print revenue from 2024 to 2026, with an operating margin expectation of 18%, which is above the 14-year average. Analysts warn that any further decline in print margins could pressure earnings. They note that cost reductions and supply chain challenges during COVID-19 resulted in a temporary higher margin environment that is not sustainable.

The bank forecasts that HP’s free cash flow (FCF) will stabilize around $3.5 billion in the near future, with an expectation of $3.2 billion by end of FY24, which aligns with HP’s guidance but is likely to be concentrated in the latter half of the year.

While potential PC growth could be beneficial, it is not expected to significantly enhance overall FCF growth due to ongoing challenges in the printing sector. Additionally, several risks that could affect this outlook were identified, including a stronger PC refresh cycle, unexpected operational profit growth impacting FCF, potential restructuring gains, currency fluctuations favoring Japanese competitors, increased enterprise spending linked to improved macro conditions, and strategic shifts under new CFO Karen Parkhill.