HP Inc. upgraded at Citi as PC momentum should drive FCF

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HP Inc. upgraded at Citi as PC momentum should drive FCF
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Shares of HP Inc. (NYSE: HPQ ) gained 1.5% in early trading on Monday after receiving its fifth upgrade this year despite the year-to-date underperformance (+2.8%, vs +15% for S&P 500 ).

Analysts at Citi upgraded the stock to Buy from Neutral and raised its price target to $33 from $31, offering nearly 20% upside from current levels.

The analysts cited three reasons for the upgrade:

  1. Ongoing enhancements in the PC ecosystem as inventory digestion wraps up, presenting the possibility for AI integration on PCs to propel increased revenue growth in the future.
  2. Substantial cost reduction that they anticipate will bolster margins and contribute to a rebound in earnings.
  3. Favorable valuations and the potential for increased free cash flow generation, positioning the company for higher buybacks.

The analysts highlighted that supply chain feedback is optimistic, indicating positive demand, completed inventory digestion, and restocking aligning with seasonal buying patterns. Further, HP's market share has improved per recent IDC data. Also, there is anticipation of AI impact on PCs, potentially enhancing the PC ecosystem economics, including ASP increases, although this awaits further evidence. Historical trends suggest higher PC revenue growth correlates with increased FCF generation and improved shareholder returns, supporting potential multiple expansion.

"HPQ has underperformed peers, and we see a path towards higher multiples as FCF generation improves amidst an improved PC environment," the analysts commented.

Some items that could keep share pressured, the analysts cautioned, is Berkshire Hathaway (NYSE: BRKa ) selling its under 10% position and the potential for margin degradation if macro pressures worsen.

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