The secular headwinds facing both of HP’s core businesses (personal systems and printing) will ultimately prevent material growth over the next several years.
By Rodney Nelson | 08-23-17 | 05:00 PM | Email Article

 HP delivered solid fiscal third-quarter results despite facing headwinds in multiple business segments. Desktops and notebooks led the way, delivering growth above our expectations, and HP’s increasing mix of premium notebooks is helping the firm outperform a weak PC market. Still, we continue to believe the secular headwinds facing both of HP’s core businesses (personal systems and printing) will ultimately prevent material growth over the next several years, and we believe competition in these markets reinforces our no-moat rating. Our $19 fair value estimate remains unchanged, and shares are trading near our fair value estimate despite modest price declines on the heels of these results.

Rodney Nelson is an equity analyst for Morningstar.

Third-quarter revenue grew 10% versus the prior-year period to $13.1 billion, well ahead of our expectations. The outperformance was largely driven by surprising results from the desktop business, which grew 5% year over year to $2.6 billion in sales. Notebooks remain the primary catalyst for the personal systems segment, as the firm enjoyed 16% growth versus the year-ago period to $5 billion in sales. The other surprise came out of the much-maligned printing supplies business, which showed stabilization one quarter ahead of management’s original expectations. Supplies revenue grew 10% to $3.1 billion, marking the second consecutive quarter of year-over-year growth after several quarters of declines in this segment.

Despite the outperformance, management’s earnings outlook for the fourth quarter and full year fell in line with our expectations, as management does not anticipate the third quarter's outperformance to extend through the remainder of the year. We were encouraged to see margins tick up in the third quarter, but we believe longer-term operating margins will see little upside from current levels.

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