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The Ratings Game: HP stock falls after downgrade as analyst warns of ‘more severe’ pressure on PCs

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The prospect of “more severe” pressures on the personal-computer industry could keep HP Inc.’s stock in check, according to an analyst.

Evercore ISI’s Amit Daryanani downgraded HP shares
HPQ,
-4.77%

to in-line from outperform over the long weekend, writing of “a confluence of headwinds around PCs and commodity markets that could negatively impact HPQ.” The stock is down 4.6% in Tuesday trading.

Daryanani pointed to “softness” in the consumer PC market, with the potential for that trend to spill over into the commercial business. His recent conversations with “industry contacts” indicated order cancellations in Europe, while China is also showing “more negative” consumer sentiment.

“More broadly, there is a risk to both consumer and commercial demand as inflation persists and macro remains uncertain,” he wrote. “Important to note, the pain is more acute in consumer but could move into commercial.”

Daryanani also has concerns stemming from a “deflationary” commodity backdrop.

“Companies have broadly stepped-up purchase commitments, and this does introduce some inventory risk if demand cools off,” he noted. “The PC makers have been more conservative relative to the networking companies, but they have still grown purchase commitments far beyond pre-pandemic levels.”

While HP has been buying back stock at an “impressive rate” over the past few years, according to Daryanani, he cautions that the company’s pace could slow depending on PC-market trends.

Excluding HP’s “above-average” repurchase levels in 2021, the company has bought back about $2.1 billion shares on average since 2016, Daryanani noted. “However, if PC demand slows, then we would expect to see buyback momentum slow in tandem from $1.5 billion/quarter over the last ~2 years to sub $500M/quarter,” he said.

Shares of HP have lost 17% over the past three months, as has the S&P 500
SPX,
-1.68%
.

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