Can HP’s share price recover following Q3 earnings?

Hewlett-Packard’s [HPQ] share price started the year on a strong footing, reaching a high of $23.93 during intraday trading on 25 February before closing at $22.91. However, the mid-March market sell-off triggered by COVID-19 saw the stock end the first quarter down 14%.

Hewlett-Packard’s share price fell as low as $12.98 on 18 March.

Whilst the slump marked the stock’s lowest value in almost four years, Hewlett-Packard’s share price did stage something of a recovery, closing at $17.17 on 26 March. Since then, it has had a turbulent journey, with its overall upward trend disrupted by frequent dips.

That being said, since 13 May — when the stock closed at $13.92 — each slump has been less severe than the last. 

With the stock down 11.3% YTD through 25 August’s close, though, how will the company’s third-quarter earnings report, due 27 August, affect Hewlett-Packard’s share price?

Can Hewlett-Packard post a fifth earnings beat? 

When Hewlett-Packard announced its second-quarter earnings on 27 May, it topped analysts’ estimates of $0.44 by posting $0.51 per share, creating a surprise of 15.9% according to Zack Equity Research. Hewlett-Packard has beaten earnings estimates for the past four consecutive quarters.

For the second quarter, the company posted an 11.2% year-over-year decline in revenue of $12.47bn, just missing the Zacks consensus estimate by 1.8%.

“The strength of HP’s diversified portfolio, go-to-market capabilities and balance sheet position us well to navigate macroeconomic challenges and drive long-term value creation,” Enrique Lores, Hewlett-Packard’s president and CEO, said in a statement released alongside the results. “The current environment will be a catalyst for transformation and innovation across HP.”

“The strength of HP’s diversified portfolio, go-to-market capabilities and balance sheet position us well to navigate macroeconomic challenges and drive long-term value creation” - Enrique Lores, Hewlett-Packard’s president and CEO

Looking ahead to its third-quarter results, Hewlett-Packard is expected to report earnings of $0.44 per share according to Zacks, which would represent a decline of 13% from the previous quarter. 

Meanwhile, the consensus estimate for revenue expects HP to post net sales of $13.56bn, which would mark an increase of 11.2% from the same period a year ago. 

For the full year, the Zacks consensus estimate is projecting earnings of $2.15 per share, which would result in a 3.8% increase from 2019. As for revenue, analysts expect Hewlett-Packard to make $54.53bn for the full year, a decline of 7.8% from the fiscal year 2019. 

Is Hewlett-Packard’s share price undervalued? 

Given the extent of uncertainty in the markets caused by COVID-19, deciding whether or not now is the time for investors to buy HP comes down to how well Hewlett-Packard’s share price can withstand economic shocks, Ben Hobson wrote in Stockopedia. He believes the stock has solid financials to “ride out market volatility”. 

Hobson goes on to note that “HP scores well against some important financial and technical measures. It's a large-cap share with strong exposure to two very influential drivers of investment returns: high quality and a relatively cheap valuation.”

“HP scores well against some important financial and technical measures. It's a large-cap share with strong exposure to two very influential drivers of investment returns: high quality and a relatively cheap valuation” - Ben Hobson

“Good quality and relatively cheap valuations are pointers to those stocks that are some of the most appealing to contrarian value investors,” Hobson concludes. “It's among these shares that genuine mispricing can be found. Once the market recognises that these quality firms are on sale, those prices often rebound”.

However, Zacks has given Hewlett-Packard’s share price a Hold rating. The consensus among 17 analysts polled by CNN Money is also to Hold the stock. This comes from a majority of 11, with only four analysts giving the share price a Buy rating. One analyst rates Hewlett-Packard’s share price as Underperform, while another suggests to Sell at its current price.

Among 15 analysts offering 12-month forecasts for Hewlett-Packard’s share price, CNN Money reports a median target of $18, with a high estimate of $23 and a low of $12. The median estimate represents a 2.4% decrease on its 25 August closing price.