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HP Inc.’s stock stood out as a gainer Tuesday, amid a selloff in the technology sector and the broader stock market, after it received a double upgrade from an analyst who laid out a bullish scenario for the personal computer and printer maker ahead of next week’s investor meeting.
HP
HPQ,
shares rose 2.5% in afternoon trading, while the Technology Select Sector SPDR ETF
XLK
sank 1.7% with 61 of 65 components losing ground. Meanwhile, the tech-heavy Nasdaq Composite
COMP
dropped 1.7%, and the S&P 500 index
SPX
declined 1.3%.
On Tuesday, B. of A. analyst Wamsi Mohan upgraded HP by two notches to buy from underperform, and hiked his stock price target to $33 from $25, on the expectation that the PC and printer maker’s free-cash flow bottoms in fiscal 2023, and that drives subsequent growth from an improving PC outlook and lower restructuring costs.
At HP’s analyst meeting scheduled for Oct. 10, Mohan expects the company to guide fiscal 2023 adjusted earnings per share to $3.40 to $3.60 and to FCF of more than $3.5 billion. Analysts surveyed by FactSet, on average, currently expect EPS of $3.30 a share and FCF of $3.1 billion for the October-ending fiscal year.
He also expects a resumption of capital returns, with management saying “100% of FCF” will be returned to shareholders and dividends will grow “in-line with earnings.”
The analyst also based his upgrade on the stock’s “attractive valuation” given its recent underperformance, as well as the relatively high dividend. The current dividend yield of 3.99% is well above the SPDR technology ETF’s yield of 0.86% and the implied yield for the S&P 500 of 1.64%.
For the year, HP shares have declined 2.1%, while the technology ETF has rallied 30.8% and the S&P 500 has gained 10.2%.
Mohan said risks to his new bullish view include more share sales by Warren Buffett’s Berkshire Hathaway Inc.
BRK.A,
BRK.B,
which is HP’s largest shareholder, weak demand in China, PC price wars, macroeconomic headwinds, and foreign currency exchange rates that favor Japanese competitors.
Back in September, Berkshire disclosed it had sold off 5.5 million shares of HP, and one analyst expressed concern that Buffett might use the Oct. 10 analyst meeting as a catalyst to sell more.
And at the end of August, HP shares fell under pressure following mixed results in the company’s earnings report, and a cautious outlook.
Back then, HP had forecast fourth-quarter earnings of 85 cents to 97 cents a share, while analysts at the time had forecast an average 95 cents a share. Analysts surveyed by FactSet currently expect fourth-quarter earnings of 90 cents a share.
Prior to the upgrade, the stock had five buy ratings, 11 hold ratings, and two sell ratings, and an average price target of $30.12, according to FactSet data.
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