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HP Inc. didn’t solve all of its issues with Monday’s fire hose of news announcements, but the printer and PC company has dramatically strengthened its hand in its battle to fend off a hostile bid from Xerox Holdings. It improved its standing with investors in the process.
First, a quick rundown of the news:
- HP (ticker: HPQ) boosted its stock-purchase plan to $15 billion from $5 billion, and vowed to return 100% of free cash to holders going forward. It will buy back at least $8 billion in stock in the first 12 months after its 2020 annual meeting.
- HP’s January quarter earnings crushed guidance, driven by a surprising jump in margins in its personal-computer business.
- HP said the coronavirus outbreak will weigh on its results for the current quarter, but it nonetheless raised its full-year financial forecasts.
- The company set a target of $3.25 to $3.65 a share for its fiscal 2022 profit. The midpoint of that range is more than a dollar ahead of the previous consensus expectation on Wall Street.
- To no one’s surprise, HP rejected the recently raised $24 a share bid from Xerox (XRX) as too low.
- And the company said it sees the value of consolidation in the printer business, and is reaching out to Xerox to see if they can find common ground.
Even the bears on HP shares found things to like. Many analysts raised their target prices on the stock to reflect the updated financial outlook and aggressive repurchase plans. There seems to be growing agreement that the prospects for the current Xerox bid are fading fast, as HP cuts costs, buys back stock, and takes other steps to carve out an independent path that boosts shareholder value.
The other interesting takeaway is that the Street seems to be more convinced that HP’s proposed talks with Xerox would turn the tables, and that HP could become the buyer. Some observers have noted that possibility since the start of this drama, given that an HP acquisition of Xerox would require much less leverage than a transaction with Xerox as the buyer.
Meanwhile, almost ignored in the latest results is the fact that HP’s biggest ongoing issue—weakness in its ink and toner business—hasn’t been resolved. Revenues from printer supplies fell again, dropping 7% year over year. That issue, by the way, is in no way addressed by a combination with Xerox.
Here’s a rundown of what analysts are saying.
Loop Capital analyst Ananda Baruah raised his rating on the stock to Buy from Hold, with a new target of $28, up from $19. He says the company’s announcements provide various scenarios that could allow the stock to keep rising.
HP stock was up 7% to $23.64 on Tuesday.
Evercore ISI analyst Amit Daryanani maintained an Outperform rating and $26 target on the stock. HP “presented a credible and aggressive shareholder return policy that is an attractive alternative to the Xerox $24 a share offer, which would be done heavily on HP’s balance sheet,” he wrote in a research note. He says he continues to “see the path higher for the stock.”
Barclays analyst Tim Long kept an Equal Weight rating, but raised his price target to $25 from $19. He said the stock-repurchase plan and a poison pill HP recently announced together “make it harder for Xerox to acquire HP.” He remained cautious on the stock given “elevated uncertainties as well as continued secular challenges in printing.”
J.P. Morgan’s Paul Coster likewise kept a Neutral rating, but raised his target to $24 from $20. “HP remains open to merger discussions with Xerox, but we sense a high bar and an eagerness to quickly pivot to this go-it-alone strategy,” he wrote. ‘We raise estimates…but we think the stock is trading close to full value.”
Morgan Stanley’s Katy Huberty stuck with her Equal Weight rating, bumping her price target to $24, from $21. “Investors have been concerned about slowing commercial PC growth and a messy transition away from the historical razor / blade printer model as HP shifts value toward printer hardware in some markets,” she wrote. But she added that the company has outlined how “earnings will grow even without top-line or mix-driven profit expansion.” She notes that “a combination with Xerox is by no means off the table,” and that management “left open the possibility of making an acquisition of Xerox’s size.”
Deutsche Bank analyst Jeriel Ong kept his Hold rating, but raised his target price to $24, from $22. He contends that Xerox now looks more like a target than a buyer. Were HP to acquire Xerox, he noted, it could require HP to slow its plan to aggressively return capital to shareholders.
“Questions remain, with no easy answers,” he wrote. “With potential downside to HP’s stock should the deal-talks fall apart in the near term, coupled with possible upside from present levels should a combination be negotiated, we continue to view HP’s risk-reward as balanced.”
Credit Suisse analyst Matthew Cabral, who has a Neutral rating and $22 target on the stock, still finds issues. He noted that the 6.7% operating margin in the computer business was the highest in his records, which date to 2003. But he sees increasing headwinds from a fading Windows 10 refresh cycle and an expected rise in memory-chip prices. While he thinks consolidation makes sense, he said HP’s poison-pill rights plan announced last week “effectively neutralizes Xerox’s proposed tender and likely extends the focus to the upcoming proxy fight, unless a negotiated transaction emerges.”
Write to Eric J. Savitz at eric.savitz@barrons.com