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Why HP Stock Just Sank 10%

By Rich Smith - Oct 4, 2019 at 11:45AM

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$1 billion in layoffs and restructuring costs "helped" to tank this stock.

What happened

Last night after close of trading, HP (HPQ 0.48%) stock (that's the tech stock you used to know as Hewlett-Packard) issued new guidance for fiscal 2020. HP stock is down 10.2% in response as of 11:05 a.m. you can probably guess that the news wasn't good.

So what

So what exactly did HP say?

The headline news is that HP expects to earn between $1.98 and $2.10 per share in 2020, as calculated according to generally accepted accounting principles (GAAP). Relative to the $2.24 per share that Wall Street analysts had estimated, that looks like a miss -- and could in and of itself explain why HP stock is falling today.

But here's the thing: HP says its pro forma profits, which are the numbers Wall Street analysts usually focus on lately, will range from $2.22 to $2.32 per share. When taken at the midpoint, that's actually a better prediction than the $2.24 analysts had predicted.  

So doesn't that mean that HP stock should be going up today, not down?

Pirate making a businessman walk the plank

Image source: Getty Images.

Now what

Not necessarily, no. You see, in addition to the earnings guidance, which could be looked at either of two ways, HP also said quite clearly last night that it expects to generate only $3 billion in free cash flow next year. Relative to the stock's lowly $24.7 billion market capitalization, that works out to a price-to-free-cash-flow ratio of only 8.2.

That sounds pretty good. Problem is, over the last 12 months, HP actually generated $4.3 billion in free cash flow. So guidance for $3 billion actually represents a pretty steep slide in cash profits in 2020 -- a slide of about 30%.

HP is blaming the $1 billion cost of restructuring its business, and it's laying off (or permitting to retire) 7,000 to 9,000 employees for the shortfall. It says these costs will be spread around and across the next three years, ultimately resulting in annual savings of $1 billion. Judging from today's stock price action, however, investors aren't interested in waiting around to see how it all plays out.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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