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Investment Overview for HP (NYSE:HPQ)
Below are key drivers of HP's value that present opportunities for upside or downside to the current Trefis price estimate for HP:
HP Printer and Ink Cartridge
- HP's Market Share : HP has been able to increase its market share in printers through new product launch and focus on Multifunction printer. Moreover, it continues to offer its products at competitive price points. As a result, its market share is improving. We currently forecast that its market share will improve to 41% on the back of new products and competitive price points. There could be 5% upside to Trefis price estimate if its market share were to increase to 45%. However, it could be 5% lower if the market share were to fall to 37%.
- Printer Ink and Toner supplies price : Supplies prices have been trending downwards as non-OEM manufacturers are remanufacturing or refilling cartridges to cut cost.Trefis currently forecast the average supplies cost to decline to $45.9. However, if prices were to rise to 2013 levels there could be 5% upside to Trefis's price estimate.
- Technology Services: We currently forecast the revenues from HP's technology services business to remain tepid in the near term and then pick up in the later years to reach $8 billion by the end of the Trefis forecast period. There could be a 5% upside to the Trefis price estimate if technology service revenues were to increase to $12 billion during our forecast period.
- Technology Services EBITDA Margin: Trefis currently forecast technology services EBITDA margin to remain stable at 2014 level of about 18.2% till the end of the Trefis forecast period. There could be 5%-6% upside to the Trefis price estimate if the margin were to increase going forward, reaching the 21% mark achieved in 2009. On the other hand, there could be 4%-5% downside to the Trefis price estimate if margins continued falling, reaching pre-crisis level of under 15% by the end of the Trefis forecast period.
Server And Storage
- Industry Standard Server shipment:
HP's share in server industry is improving on the back of strong offering in the X86 segment. On a worldwide basis, hyperscale data center deployments as well as service provider installations drove the x86-based server market upward. Trefis currently forecast ISS shipment to increase to 3.47 million by the end of forecast period. There could be 4% upside to the Trefis price estimate if the shipments were to increase going forward. On the other hand, there could be 4% downside to the Trefis price estimate if shipment were to fall to 2010 levels.
PCs, Workstations & Others
- HP Market Share in Notebooks & Netbooks Sold: We currently forecast HP's market share in the global notebooks & netbooks market will increase to around 20.6%. However, there could be a 2% downside to the Trefis price estimate if HP's market share were to fall to 15% in the future.
HP is known by consumers primarily for its PCs and printing products. However, its fastest growing division is its services businesses that is focused on business customers and alone constitutes about 23% of the firm value. HP Services provides outsourcing and consulting services primarily to Fortune 500 clients. Through outsourcing services, clients can reduce their IT cost structure by contracting out the maintenance of IT hardware and software. Similarly, HP assists customers in reducing costs in other business support areas such as human resources, accounting and procurement.
Huge Printing Business
HP is the global leader in the printer market with over 40% share in printer units sold globally as of 2014. We expect the firm to maintain its leadership position in the printer market in the future and estimate that the firm derives as much as ~27% of its value from the printing business
Services Unit -A Large Driver of Value
HP services is a complete outsourcing unit with outsourcing services ranging from information technology outsourcing to application outsourcing and business process outsourcing. Since the acquisition of EDS in 2008, the outsourcing has gained traction in an increasingly competitive and open business environment.
HP is the global leader in the Server market
HP is one of the largest players in the server industry with over 24% market share in 2014. The company derives nearly ~14% of its value from the server business. With HP now committed to launching new servers, especially in the high computing through moonshot servers, we expect the company will hold on to its leading market share going forward by investing into R&D and coming up with innovative products.
HP is the global leader in the PC market
HP is the second largest PC vendor in the world with over 19% market share in 2014. The company derives nearly 13% of its value from the PC business (the Personal Systems Group or PSG). With HP now committed to revive its PC business, we expect the company will hold on to its leading market share going forward by investing into R&D and coming up with innovative products.
Competitors such as Lenovo have surpassed HP in many segments, but it is still one of the top players in the global PC market.
Rising Popularity of tablets and HP's renewed focus on PCs
With the launch of Apple's iPad in 2010, the demand for tablet PCs has increased at a rapid rate. We believe that this trend will continue as both phone and PC manufacturers like RIM, Motorola Mobility, Samsung, HP and Dell enter into the tablet market in a big way.
HP re-entered the market in 2013 with tablet devices based on Windows and Android platform. These tablets are targeting both consumers as well as enterprises. If HP manages to capture mind and market share this time with its Windows and android based tablets, there could be a tremendous upside potential to the firm.
Consulting has High Exposure to Discretionary IT Spend
Consulting is the most discretionary part of a company's IT spending budget, and hence the most likely to suffer among all services divisions in a slowdown. HP Consulting and SI business provides solutions in the areas of IT architecture and infrastructure, custom applications and packaged applications, security, IT services management and information management.
Outsourcing is a Defensive Business
In a recessionary environment cost triumphs over value as firms look to do the bare minimum to sustain their business. Outsourcing helps companies keep costs low. HP's outsourcing business did well during the the economic recession of 2008-09 and will continue to do so as its clients now face increasing competition and pressure in an uncertain economic environment.
Trefis Forecast Rationale for Printer & Cartridges EBITDA Margin
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-cash charges such as Stock-Based Compensation Expense.
Historically, the margin has grown from around 16.5% in 2005 to around 21% in 2010. It declined in 2011 to 18% before going up to 19.6% in 2012. However, it improved to 22.5% in 2014.
Despite this recent increase, we expect margin to stabilize at these levels going forward driven as we expect some fall in hardware revenue (more than software and services) caused by reduced consumer and business spending on hardware as cloud based services gain increasing popularity.
Trefis considered the following factors for its forecast:
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- Hardware industry most prone to spending cuts
- As economic uncertainty continues (particularly in europe) and companies face budget crunch and look to reduce IT spending, the hardware industry is most likely to be worst hit as companies simply stop buying hardware. As sales go down, margins will be negatively impacted.
- We expect limited upside to margin in the printer and cartridges business for the following reasons
- Decline in revenues due to reduced demand
- Greater fixed and operational costs. Further, these costs cannot be eliminated as it requires huge capex to have the whole manufacturing set up again
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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