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HP Is Fighting Hard to Escape the Hostile Xerox Takeover

By Anders Bylund – Feb 25, 2020 at 4:10PM

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The IT giant posted solid first-quarter results and announced a massive share-buyback campaign.

Information technology veteran HP (HPQ -2.23%) reported results for the first quarter of 2020 Monday evening. The maker of personal computers, workstations, printers, and related supplies posted a significant earnings surprise but followed up with a mixed bag of guidance targets for the next quarter and fiscal year. HP also launched an ambitious share buyback and laid out a detailed capital return program for the next three years.

HP's first-quarter results by the numbers


Q1 2020

Q1 2019


Analyst Consensus


$14.6 billion

$14.7 billion


$14.6 billion

GAAP net income

$678 million

$803 million



Adjusted earnings per share (diluted)





Data source: HP. GAAP = generally accepted accounting principles.

Sales rose 2% year over year in the personal systems division, supported by a 4% increase in unit volumes amid a 2% decrease in revenues per unit. Commercial systems sales rose by 7% while consumer sales fell by 7%. This was the 15th straight quarter of year-over-year revenue increases in HP's personal systems division.

Printing sales fell 7% as unit volumes came in 10% lower but unit prices increased by 3%. Commercial sales fell by 1% and consumer revenues dropped 13% lower. The printing market is wobbly at the moment, and HP has chosen to focus on higher-margin customers even if that leads to smaller top-line collections.

Looking ahead to the second quarter, HP expects continued weakness in the printing market and pockets of component supply shortages in the personal systems segment. The coronavirus outbreak is putting additional pressure on HP's revenue streams with a negative effect of approximately $0.08 per share to the second quarter's adjusted earnings. Operating margins should improve in the second half of 2020 as HP's cost-cutting responses to the coronavirus situation start to take effect.

Based on these near-term projections, HP set its adjusted second-quarter earnings target to roughly $0.51 per share while raising its full-year earnings outlook from $2.28 to $2.38 per share. The analyst consensus currently calls for $0.54 and $2.26 per share, respectively.

Two large puzzle pieces composed of several dozen people.

Image source: Getty Images.

HP still hates the Xerox deal

Let's address the towering elephant in the room. HP's management continues to believe that the merger offer from Xerox (XRX) is "not in the best interest of HP shareholders." The latest buyout offer, $24 per HP share, is too low in HP's opinion, and the post-merger company would be saddled with "a highly leveraged and irresponsible capital structure."

The $15 billion share-buyback plan that HP launched this week was designed to undermine the Xerox offer, and HP also implemented a so-called poison pill policy earlier this month. The company is doing everything in its power to stave off Xerox's unwanted advances.

HP's shares rose as much as 8.2% in Tuesday's morning session. Xerox shares also rose by 4.5% as investors smelled more value in the HP buyout idea. If Xerox manages to close that deal, HP will be carried into that merger kicking and screaming. The combination of massive share buybacks and a fresh poison pill just might be enough to keep the two companies apart.

Until this unwanted business combination is either completed or killed, I'm content to stay on the sidelines of both stocks. Buying Xerox or HP shares today is a gambler's bet on a successful merger, which boils down to a coin toss. Serious investors can find lots of stronger and safer ideas in the tech sector.

Anders Bylund 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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HP Inc. Stock Quote
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$25.04 (-2.23%) $0.57
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