HPQ and HPE just reported earnings: Quint Tatro says only one is a ‘buy’

HP Inc just reported weaker-than-expected earnings for the third quarter. Its shares are down more than 6.0% in extended hours.

Pro says buy HPE and avoid HPQ

Investors are nervous also because the management said fundamentals were not improving as quickly as they had hoped and issued a not-so-upbeat guidance for the current quarter.

HP now forecasts its adjusted profit to fall between 85 cents and 97 cents in the fourth quarter. Analysts, in comparison, were at 96 cents. The multinational trimmed its guidance for the full year as well.

On the flip side, HP Enterprise also reported its quarterly update today that topped Street estimates. The IT company raised its future outlook as well. According to Joule Financial’s Quint Tatro:

Enterprise side is the place to be. We would slap a buy rating on it. HPQ – the more computer-driven segment is a no touch for us.

HP Inc third-quarter financial highlights

• Earned $766 million versus the year-ago $1.12 billion
• Per-share earnings also declined from $1.08 to 76 cents
• Adjusted EPS printed at 86 cents as per the press release
• Revenue went down 10% year-on-year to $13.2 billion
• Consensus was 86 cents a share on $13.4 billion revenue

But the California-based company saw its free cash flow and operating profit grow sequentially in the third quarter. Still, Quint Tatro said today on CNBC’s “The Exchange”:

Balance sheet is a huge differentiator for us. Enterprise side is the darling balance sheet with the debt still on the HPQ side which is basically showing a negative book value.

Does AI benefit HPQ or HPE?

HP Inc said its PC business tanked 11% on a year-over-year basis to $8.9 billion but still topped Street estimates by some $200 million.

According to CEO Enrique Lores, demand for consumer PCs was strong but increased inventory levels continued to weigh on prices in Q3. He expects inventories to normalise after one more quarter.

Nonetheless, its Personal Systems business expanded market share in the recently concluded quarter. The Chief Executive said sales will likely charge up next year on the back of AI products. But Tatro expects artificial intelligence as well to be a bigger catalyst for HP Enterprise.

We’d be a buyer of HPE especially with the AI developments. It’s a healthy balance sheet with modest earnings growth and an attractive valuation. So, I think there’s some upside there.

HP Inc lowered its debt in Q3

HPQ paid down $1.1 billion worth of long-term debt in its third quarter.

It did not buy back stock in Q3 but expects to start repurchasing in the fourth quarter and ramp up further in fiscal 2024.

The New York listed firm saw its Printing revenue slide a more-than-expected 7.0% to $4.7 billion in the third quarter on lower demand. You can dive into the details of how “HPE” performed in its recent quarter here.

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