HP stock buyback plan makes Xerox takeover a tougher task, analysts say

It may have just gotten more difficult for Xerox Holdings Corp. to buy HP Inc., even though HP has finally indicated a willingness to discuss a potential combination with its printer rival.

HP HPQ, +6.09% topped earnings expectations Monday, but more importantly, detailed a three-year value-creation plan that could see the company buy back $16 billion of its stock by fiscal 2022. The company also set a fiscal 2022 adjusted earnings-per-share target of $3.25 to $3.65.

“This, combined with the poison pill adopted last week, in our view makes it harder for Xerox XRX, +3.53% to acquire HP,” BMO Capital Markets analyst Tim Long wrote. He has an equal-weight rating on HP’s stock and raised his price target to $25 from $19.

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Evercore ISI analyst Amit Daryanani called HP’s plan “a credible and aggressive shareholder return policy that is an attractive alternative to the Xerox $24/share offer, which would weigh heavily on HP’s balance sheet.” He reiterated his outperform rating and $26 target price in a note titled “My Money, My Rules.”

HP’s stock is up 5.9% in Tuesday morning trading, while Xerox shares are up 4.1%.

Deutsche Bank analyst Jeriel Ong keyed in on the sense out of HP’s conference call that while the company was leaving the door open to a possible combination with Xerox, HP’s balance sheet plans imply that the company is looking at Xerox “more likely as a target versus acquirer.”

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The “firehouse of information” coming out of HP’s report only left Ong with more questions about HP’s future, including what impact a potential Xerox deal would have on the company’s share-buyback or cost-saving plans.

“With potential downside to HPQ’s stock should the deal-talks fall apart in the near term, coupled with possible upside from present levels should a combination be negotiated, we continue to view HPQ’s risk-reward as balanced at the present trading level,” wrote Ong, who has a hold rating on HP’s stock but upped his price target to $24 from $22 after the report.

HP shares have risen 17% over the past three months, while the S&P 500 SPX, -0.54% has gained 3.2%.

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