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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:
- Infrastructure Outsourcing Revenues: We currently forecast the revenues from HP's infrastructure outsourcing business will fall in the near term and then pick up in the later years to reach $16 billion by the end of the Trefis forecast period. There could be a 5% upside to the Trefis price estimate if infrastructure outsourcing revenues were to increase to $18 billion during our forecast period. Our estimate is based on guidance provided by the company in its Securities Analyst presentation.
- Infrastructure Outsourcing EBITDA Margin: We currently forecast infrastructure outsourcing EBITDA margin to remain stable at 2012 level of about 17% till the end of the Trefis forecast period. There could be 5%-6% upside to the Trefis price estimate if margin were to increase going forward, reaching the 20% 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.
PCs, Workstations & Others
- HP Market Share in Notebooks & Netbooks Sold: We currently forecast HP's market share in the global notebooks & netbooks market will reduce gradually going forward to around 11%. There could be however be a 2% downside to the Trefis price estimate if HP's market share continued falling at current rate in the future reaching 8% by the end of Trefis forecast period.
HP is known by consumers primarily for its PCs and printing products. However, the single largest driver of HP's value is its services businesses that is focused on business customers and alone constitutes about 39% of the firm value. HP Services provides outsourcing and consulting services primarily to Fortune 500 clients. Through outsourcing services provided by EDS (a part of HP), 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.
EDS a Large Driver of Value
EDS is a complete outsourcing unit with outsourcing services ranging from information technology outsourcing to application outsourcing and business process outsourcing. HP acquired EDS in 2008 to enhance its outsourcing business, and we believe the step has helped HP move in the right direction as outsourcing has gained traction in an increasingly competitive and open business environment since. Despite the write-downs related to the EDS acquisition, the outsourcing business is bound to pick up once the global IT spending trend reverses and outsourcing revenues increase.
Huge Printing Business
HP is the global leader in the printer market with over 41% share in printer units sold globally as of 2012. 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 ~19% of its value from the printing business
HP is the global leader in the PC market
HP is by far the largest PC vendor in the world with over 16% market share in 2012. The company derives nearly 15% 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 closed the gap and even surpassed HP in certain 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.
While the HP's plan to enter the market in a big way in 2011 with tablet devices based on its WebOS platform have been laid to rest, the firm is not giving up on the market yet. With renewed focus on its Personal Systems Group (PSG) under CEO Meg Whitman, HP will be launching fresh line of tablets based on the Windows 8 operating system in late 2012 and will be targeting both consumers as well as enterprises.
If HP manages to capture mind and market share this time with its Windows 8 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.
However, as the economy recovers, HP's consulting is expected to pick up.
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 with only a slight decline 0.7% during 2010. It further declined in 2011 to 18% before going up to 19.6% in 2012.
Despite this, we expect significant margin compression going forward driven by a steep 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.
Back to Company Overview
- Hardware industry most prone to spending cuts
- As economic uncertainty continues 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 a continued margin compression 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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