$HPQ Fiscal Q2 Earnings Preview

by Dan May 21, 2015 11:13 am • Commentary

Event: Hewlett Packard (HPQ) reports their fiscal Q2 results tonight after the close. The options market is implying about a 5% one day move which is shy of the 4 qtr average move of about 6.3%.  The last 4 post earnings moves were: down 9.9% in February, proceeded by three straight rallies of 4%, 5.35% and 6.1%.  

Sentiment: Wall Street analysts are moderately bullish on the stock with 19 Buy ratings, 14 Holds and 1 Sell with a 12 month avg price target of $40.63, about 22% higher than current levels.  Short interest is at multi-year lows at only 1% of the float.

[caption id="attachment_53861" align="aligncenter" width="600"]HPQ short interest from Bloomberg HPQ short interest from Bloomberg[/caption]

Price Action / Technichians:  HPQ is down 16.5% in 2015, and down about 18.5% from the 52 week and two and half year highs.

The seven year chart below shows just how important the recent failure at $40 was, and how the stock needs to hold $30 to the downside, as there is little support below:

[caption id="attachment_53865" align="aligncenter" width="600"]HPQ 7yr chart from Bloomberg HPQ 7yr chart from Bloomberg[/caption]

On a shorter term basis, the stock has been basing over the last month between $33 and $34 and could easily make a move back to the gap level from Q1 earnings in Feb around $36 and threaten a gap fill over the coming weeks on a beat and raise.  On the downside, $32 is kind of the line in the sand that could put a 2 handle in play if it were to break on a miss and guide down:

[caption id="attachment_53866" align="aligncenter" width="600"]HOQ 1yr chart from Bloomberg HOQ 1yr chart from Bloomberg[/caption]

Volatility SnapShot: Short dated options prices are high as expected into the earnings event, but it is important to note that the recent base I mentioned above has caused realized volatility (white line, how much the stock is moving) to flat-line, causing implied volatility (the price of options – blue line) to look fairly expensive:

[caption id="attachment_53867" align="aligncenter" width="600"]HPQ 1yr chart of 30 day at the money IV (blue) vs realized vol (white) from Bloomberg HPQ 1yr chart of 30 day at the money IV (blue) vs realized vol (white) from Bloomberg[/caption]


My View:  The stock is a value trap in my opinion, in the midst of a perpetual restructuring that has resulted in a plan announced last fall to split the company in two publicly traded entities, computer/printers and enterprise servers and services which will be accompanied by layoffs of 5,000 workers to cut costs.  In front of the impending split this year the company guided down their free-cash flow forecast for the year sending the stock down 10% the day after the report back in February, before finding some footing weeks later down 20%.

Expectations are low heading into tonight’s earnings, and investors and analysts alike will be most focused on any commentary regarding the benefits of the split.  A weak PC market is fairly well known at this point, and some of the data points for enterprise demand for services has been a bit mixed.

It is my sense that with short interest non-existent that the shorts have given up a bit (or merely taken profits) in front of the split which could cause a downdraft in the event of a second consecutive miss and guide down.

On the flip-side the lack of short interest places the magnitude of an upside gap on a beat and guide higher in a more modest range, making an out-sized move that much harder to achieve.

All hat said the stock appears poised for movement. We will take a closer look prior to the close.

Estimates and Forecasts from Bloomberg:
* 2Q adj EPS est. 86c (range 82c-89c) vs forecast 84c-88c (Feb. 24)
* 2Q rev. est. $25.66b (range $24.92b-$26.31b)
* 2Q gross margin est. 23.9% (range 23%-25.4%)

* 3Q adj. EPS est. 87c
* 3Q rev. est. $25.91b

* FY15 adj EPS est. $3.64 (range $3.52-$3.73) vs forecast $3.53-$3.73 (Feb. 24)
* FY15 rev. est. $105.45b (range $103.37b-$108.13b)