Who's Perturbed HP Raised Q3 Guidance, But Didn't Adjust The Full-Year Guidance? Bernstein Is

HP Inc (NYSE: HPQ) issued a surprise fiscal Q3 earnings announcement after the market close on Tuesday. The announcement included the sale of its marketing optimization assets, which will produce Q3 gains of $245 million and Q4 gains of $40 million for HP.

In light of the sale, HP increased its Q3 EPS guidance by $0.03, but Bernstein analyst A.M. Sacconaghi, Jr. is not fooled. HP also maintains its full-year 2016 EPS guidance of $1.59–$1.65 and lowered its fiscal 2016 FCF guidance by $300 million.

“At a high level, HP’s 2H FY 16 EPS will benefit from an incremental $0.13 gain from a disposition, yet the company did not change its guidance — instead, it will effectively use the gain as an offset to draw down supplies channel inventory (an estimated $0.08 hit),” Sacconaghi explained.

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It seems as if the market was not fooled by the financial maneuvering either. HP shares were down 4.7 percent in early Wednesday trading.

Sacconaghi sees HP’s move as a repeat of International Business Machines (NYSE: IBM)’s move to use a one-time $1 billion Q1 tax gain to initiate a workforce rebalancing initiative.

“Our take is that HPQ likely didn’t have a good handle on its supplies channel inventory levels—either it was higher than it believed, or the company was unrealistic about what the right inventory level was,” Sacconaghi concluded.

Bernstein maintains an Outperform rating and $15 price target for HP.

Disclosure: The author holds no position in the stocks mentioned.