The Ratings Game: HP’s stock slides on concerns that its new strategy is ‘fraught with risk’

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HP Inc. is planning a big change to its business model, but investors and analysts seem far from sold on the company’s new strategy.

Shares of HP HPQ, -9.21% are off 10% in Friday trading after the company held an analyst day the prior evening. There, the PC and printer giant announced plans to lay off 7,000 to 9,000 workers over the next three years as it sets its course toward a more software- and services-focused business model.

A key element of HP’s transition is a new strategy that will make consumers choose between paying for more expensive printers while gaining more flexibility in their purchase of supplies or buying subsidized hardware that will only be compatible with HP’s own supplies. The move comes as HP must contend with falling market share in supplies and a rise in counterfeit inks and toners.

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Wells Fargo analyst Aaron Rakers called the decision a “largely unavoidable … capitulation” that’s a net negative for HP’s stock. “We think that there is growing execution risk associated with HP’s realignment of its printing business and simultaneous cost-cutting efforts,” he wrote, as questions remain about whether the net cost savings will really be significant amid simultaneous pressures to reinvest in its new business model. He also thinks investors will wonder whether further cost cuts are to come.

His rating on the stock is market perform, with a $20 target.

Bank of America Merrill Lynch analyst Wamsi Mohan remains skeptical of HP’s prospects as the company undergoes its transition. Among his concerns are that the changes will take numerous years to execute and that HP increases its risk of hardware share losses as it tries to capture more initial value from sales of printers with more flexible supply models.

“We view HP as a story where the company is taking actions to stabilize problem areas in the business (supplies) but faces headwinds from the installed base (requires investments) that detract from the gross overall restructuring savings of $1 billion,” he wrote. Mohan expects macroeconomic headwinds to pressure the company’s operating profit and cash flows in the meantime, he said.

He kept an underperform rating on the stock while lowering his share-price target to $16 from $17.

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Bernstein’s Toni Sacconaghi called the plan “fraught with risk” for numerous reasons. “Competitors will not follow, leaving HP as a relatively high-priced player,” he wrote. “HP’s $13 billion supplies business runs off faster than HP can migrate its business model, which will be rolled out slowly and in a highly segmented manner.”

In addition, he said it’s unclear that HP’s ultimate business model will result in similar profit levels to its current business, and he worries that the company is facing problems beyond counterfeit supplies, including that sustainability initiatives and digital habits could be leading to a general decline in printing volumes.

Sacconaghi has a market perform rating on the stock and a $20 target price.

FactSet shows that analysts have been overwhelmingly on the sidelines when it came to HP heading into the analyst day. Of the 16 analysts tracked by the service who cover HP’s stock, 14 have hold ratings on it. One has a buy rating, and the other has a sell rating.

The stock is off 22% over the past three months, as the S&P 500 SPX, +0.90% has lost 2.2% in that time.