Why HP stock fell nearly 4% on Friday

HP (HPQ -3.91%) it wasn’t exactly the beauty of Friday’s stock market ball. While the company had little news to report that day, its stock was jolted by a new analyst research note. This led to an outflow of investors from the stock, leaving it nearly 4% down in price at the market close. This was a significantly sharper decline than the 0.1% decline a S&P 500 index.

Too reliant on EPS-boosting share buybacks

This analyst move was a downgrade recommendation adopted by the influential Wamsi Mohan Bank of America (BAC -0.30%). Well before the market opened on Wednesday, Mohan dropped his recommendation on HP to neutral from his previous buy. He maintained his price target of $37 per share.

In his view, the veteran tech company’s earnings per share (EPS) growth will come not from organic improvements in profitability, but from share buybacks that reduce the number of shares outstanding. Mohan believes that the potential upside in PC sales due to factors such as the inclusion of artificial intelligence (AI) functionality in newer models will not offset the expected declines in profit margins for printer products.

“Our sensitivity analysis suggests that it will be difficult to drive material positive revisions to estimates,” he concluded in his analysis.

All is not lost

Mohan added that several factors could provide a boost to HP’s fundamentals, if realized. These include a more robust PC refresh cycle, stronger-than-anticipated cost reductions stemming from ongoing restructuring and beneficial changes in corporate strategy from recently appointed CEO Karen Parkhill.