HP Shouldn't Expect Much Growth From Printing Looking Forward, Sterne Agee Says

Sterne Agee said it would be tough for HP Inc (NYSE: HPQ) to see near-term growth in its printing business, while its PC unit is stabilizing.

"Near term, we continue to believe HPQ's one positive is that PC unit declines look set to moderate to just low single-digits Y/Y in 2HFY16 thanks to much easier comps and lower inventories. However, we believe Printing continues to look fundamentally weak with no reason to expect growth anytime on the horizon," analyst Rob Cihra wrote in a note.

HP said it would "book a new $285 million in gains from selling the balance of its Marketing Optimization assets to Open Text Corporation (USA) (NASDAQ: OTEX)," which would allow HP to meet FY16 EPS guide. The move will also be used to offset actions to dramatically cut its printing supplies (ink and toner) channel inventory levels over the next two quarters.

Related Link: Citi Skeptical On HP's Radical Shift In Its Supplies Pricing Model

Cihra, who maintains his Neutral rating and $12 price target on the stock, has raised his 2016 EPS view to $1.60 from $1.57, while sticking to his 2017 EPS estimate of $1.66.

"The one-time gain boosts our FY16 EPS 3c to $1.60 but leaves the quality of earnings less than optimal," Cihra noted.

The analyst noted that actions to draw down channel inventories are expected to reduce HP's supplies revenue by $225 million in each FQ3 and FQ4 (i.e., one-time cuts). HP sees this cut in channel inventories "setting up a positive payback period once and for all over the next three years."

"HPQ continues to see Supplies revenue ex-currency ultimately stabilizing by the end of FY17E, although our forecasts do not get to any 'growth' in the next three to four years," Cihra added.

At the time of writing, shares of HP were down 4.69 percent to $12.70 on the day.