$HPQ Fiscal Q2 Earnings Preview

by Dan May 22, 2013 1:11 pm • Commentary

Event:  HPQ reports their fiscal Q2 earnings tonight after the close.  The options market is implying about an 8% move vs the 4 qtr avg move of about 9%.

Sentiment:  Wall Street analysts remain on the sidelines on the stock with only 6 Buys, 20 Holds and 10 Sell ratings with an avg 12 month price target of ~$19.30.  Short interest sits at about 3.25% of the shares outstanding, down a couple of % from the 52 week highs back in the fall.

Price Action / Technicals:   HPQ bottomed on capitulation volume in November, and the stock has been in a steady uptrend ever since:

HPQ 1 yr chart from Bloomberg
HPQ 1 yr chart from Bloomberg

However, the stock topped out in early April, and has been a relative underperformer vs. the rest of the market ever since.  The key level of resistance to watch is the April high around $24, and the key level of support is the April low around $19.

Open Interest / Options Volume:   Call to put open interest ratio is 0.9 to 1, so more puts outstanding than calls.  The 1 month volume has been skewed to calls by 1.2 to 1.  The heaviest open interest is in the June 18 to 23 strike area, and the Jan14 15, 20 and 25 strikes.

Vol Snapshot:  HPQ 30 day implied volatility (in read) is near its highest level over the past year:

30 day IV (red) vs. 30 day HV (blue) in HPQ, Courtesy of LiveVolPro
30 day IV (red) vs. 30 day HV (blue) in HPQ, Courtesy of LiveVolPro

Meanwhile, realized volatility is near the lows of the past year, as HPQ has remained range-bound over the past month.  Implied volatility looks too high to us based on this low realized volatility, especially since we don’t expect HPQ stock to break 24 to the upside or 19 to the downside.

Fundamentals:  The current fundamental picture was fairly adequately summed up by Goldman’s  downgraded of HPQ back on April 2nd from Neutral to Sell , they had the following reasons:

We downgrade Hewlett-Packard to Sell from Neutral with 31% downside to our price target vs. 6% average downside for our universe. We believe that EPS expectations could face downward revisions in coming quarters and that any recovery in earnings power will be muted through FY2014. We also believe the current restructuring actions will be largely countered by incremental weakness in PCs, enterprise hardware, services and printing in FY2013. Moreover, the company’s reinvestment needs (in order to grow) remain pronounced after years of restructuring and could pressure profits and require more aggressive M&A beyond FY2013

IN Goldman’s preview note dated May 20th, they had the following to say about expectations into tonight’s print:

We expect a generally in-line EPS performance (we are at $0.80 versus consensus of $0.81), though revenues could fall short due to weaker demand trends and competitive pressures in PCs and enterprise hardware. With HP facing incremental pressure in most of its key end markets, we continue to believe that fullyear consensus remains too optimistic, and our EPS estimates remain sharply below consensus for the year ($3.26 versus $3.49 for FY2013). Signs of this incremental pressure could begin to emerge on this week’s call and with the company’s July quarter guidance. Indeed, our July quarter estimates are for revenues and EPS of $28.01 billion and $0.76, which compares to consensus of $27.78 billion and $0.83.

MY VIEW:   With the stock trading at just 6x next years expected earnings, valuation is kind of out the window on this one, some as Jim Chanos have called it the ultimate “Value Trap“.    From an investment perspective a lot of good news may be in stock at current levels given the company’s reliance on hardware.  Any real value on a long term perspective will be realized through costs cutting, shedding non-core assets and a shift towards high margin services.  From  a trading perspective, selling the move, while fat, could be a dicey proposition as any incremental improvement on restructuring efforts could cause investor enthusiasm.  Expectations are clearly low heading into the print as many large cap tech multinationals results reflected currency headwinds and a generally weak IT spending environment.

We are looking at potential trades and will post anything that looks attractive or that we act on.



  •  2Q adj. EPS est. 81c (range 77c-83c); Feb. 21, HPQ forecast   2Q adj. EPS 80c-82c
  • 2Q rev. est. $28b ($27b-$29b
  • 3Q adj. EPS est. 83c (73c-92c)
  • 3Q rev. est. $27.8b ($26.4b-$28.6b)
  • Full-year adj. EPS est. $3.46 ($3.20-$4.10); Feb. 21, HPQ forecast yr adj. EPS $3.40-$3.60