Lenovo Group: Outlook Is Negative Despite In-Line Earnings

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Elevator Pitch

My finance standing for Lenovo Group Limited's (OTCPK:LNVGY) [992:HK] banal is simply a Hold.

I antecedently analyzed Lenovo Group's cardinal businesses pinch my earlier December 7, 2019 write-up for nan company. With this latest article, my attraction turns to nan reappraisal of Lenovo Group's astir caller quarterly financial results.

Lenovo Group's Q3 FY 2023 (YE March) results were mixed. While nan institution registered beneath expectations apical statement successful nan caller quarter, its Q3 net were successful statement pinch nan waste side's statement estimate. Looking ahead, Lenovo Group's financial capacity successful nan upcoming 4th and full-year fiscal 2024 is expected to beryllium weak, but this has been priced into nan stock's valuations. After considering nan company's caller results and adjacent word outlook, I deem Lenovo Group's shares to beryllium worthy of a Hold rating.

Revenue Miss

Lenovo Group reported nan company's earnings for nan 3rd quarter of fiscal 2023 connected February 16 aft trading hours.

Revenue for Lenovo Group dropped by -24.1% from $20,127 cardinal for Q3 FY 2022 to $15,267 cardinal successful Q3 FY 2023. This besides translated into a -10.7% QoQ contraction successful nan company's apical statement for nan caller quarter. Lenovo Group's existent 3rd 4th apical statement missed nan sell-side analysts' statement gross estimate of $15,860 cardinal by -3.7% arsenic per S&P Capital IQ data.

The institution acknowledged astatine its Q3 FY 2023 net call that its income were negatively affected by "a terrible downturn" successful nan PC (Personal Computer) industry. In addition, Lenovo Group's reported apical statement was wounded by a stronger US dollar. Lenovo Group revealed astatine its 3rd 4th results briefing that its apical statement was only "down 18% successful changeless currency" versus a -24% autumn successful its header revenue.

But Lenovo Group's Q3 FY 2023 bottommost statement didn't disappoint nan market, arsenic elaborate successful nan consequent section.

In-Line Earnings

The company's nett income attributable to shareholders decreased by -31.7% YoY and -19.2% QoQ to $437 cardinal for Q3 FY 2023. Nevertheless, Lenovo Group's caller 3rd 4th bottommost statement was mostly successful statement pinch expectations, taking into relationship nan market's statement nett profit forecast of $435 cardinal (source: S&P Capital IQ).

Even though Lenovo Group's apical statement didn't meet nan sell-side's expectations, nan institution managed to present in-line net arsenic its existent profit margins hit nan statement financial projections.

Lenovo Group's gross profit separator improved from 16.7% for Q3 FY 2022 and 16.8% for Q2 FY 2023 to 17.1% successful Q3 FY 2023. The EBIT separator for nan institution besides expanded by +0.3 percent points from 4.6% successful Q3 FY 2022 to 4.9% for Q3 FY 2023. The existent Q3 FY 2023 gross separator and EBIT separator for Lenovo Group exceeded nan statement forecasts by +40 ground points and +60 ground points, respectively according to S&P Capital IQ data.

At its astir caller quarterly results call, Lenovo Group noted that it has witnessed a "favorable commodity (costs) trend", while trying its champion "to negociate our expenses from each angle." In different words, bully costs power and an easing of inflationary costs pressures person helped Lenovo Group to execute amended than expected profit margins and in-line nett income for Q3 FY 2023.

Negative Short-Term Outlook

The financial outlook for Lenovo Group successful nan short word isn't favorable.

Based connected nan sell-side's statement financial forecasts taken from S&P Capital IQ, Lenovo Group's apical statement and bottommost statement are projected to alteration by -21.6% and -39.2% to $13,081 cardinal and $250 million, respectively successful Q4 FY 2023. The analysts besides estimate that Lenovo Group's nett profit attributable to shareholders will still diminution by -1.6% to $1,706 cardinal successful FY 2024 (April 1, 2023 to March 31, 2024), which could perchance people nan 2nd consecutive twelvemonth of net contraction for nan company.

Lenovo Group's antagonistic outlook successful nan adjacent word is validated by manufacture information and nan company's guidance comments.

Seeking Alpha News reported connected February 1, 2023 that Gartner is predicting a -4.4% driblet successful "device shipments (including PCs, tablets and mobile phones)" for nan existent almanac year. Separately, Lenovo Group highlighted astatine nan company's astir caller Q3 net briefing that "in nan short-term, nan full addressable marketplace for PCs would return to its pre-COVID level."

Undemanding Valuations

Lenovo Group's existent valuations person factored successful nan antagonistic outlook for nan institution to a sizeable extent.

The marketplace values Lenovo Group astatine 7.1 times statement guardant adjacent 12 months' P/E now, which represents a important -35% discount to nan stock's five-year mean P/E aggregate of 10.9 times arsenic per S&P Capital IQ.

Furthermore, Lenovo Group besides trades astatine a meaningful valuation discount to its peer, HP Inc. (HPQ). HPQ is presently weighted by nan marketplace astatine a statement guardant adjacent 12 months' P/E ratio of 9.1 times.

Closing Thoughts

I complaint Lenovo Group's shares arsenic a Hold. The company's financial outlook for Q4 FY 2023 and FY 2024 isn't encouraging, arsenic anemic PC request will proceed to measurement connected its financial capacity successful nan short term. On nan affirmative broadside of things, Lenovo Group's valuations person priced successful nan antagonistic prospects for nan company. As such, a Hold standing for Lenovo Group is fair.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.