Reviewing HP’s Performance in 2014

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HPQ: Hewlett logo
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Hewlett-Packard (NYSE:HPQ) has been one of the few enterprise tech hardware company that has outperformed the markets during the year. While the return on S&P 500 was over 13%, HP’s stock rose by 45% from $27.66 to $40. The primary reason for this increase was the improvement in HP’s share in PC and server market. However, its services segment continues to underperform due to intense competition within the sector and a tepid business environment. In 2014, HP took some prudent steps to ensure that its revenues stabilize and grow in the ensuing years. One of the major announcements was splitting the company into two entities. In this note, we review HP’s performance during the year and steps it took to boost its revenues.

See our full analysis on HP

Proposed Split Of HP Into Two

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In October, HP proposed splitting itself into two public companies, HP Inc and HP Enterprise. The spinoff has been fueled by the idea that companies with a narrower focus perform better. While HP Inc will focus on personal computer and printing operations business, HP Enterprise will focus on corporate hardware and IT services. HP Inc will be headed by Dion Weisler (current Executive Vice President of HP’s Printing and Personal Systems), while Meg Whitman will continue to head HP Enterprise division. [1] The company hopes to unlock value for shareholders by delivering products and services at competitive price points. HP Enterprise unit will consist of its server, storage, networking, converged systems, cloud, software and financial services divisions. Currently, these divisions map onto HP Services, Server & Storage, HP Software, HP Networking and Financial Services divisions in our model. Together, these divisions make up 64% of HP’s estimated value. These divisions are on the forefronts of technology in areas such as Cloud computing, big data, mobility and security, and require continuous investment, both organic and through M&A, to bolster existing product portfolios and innovate new products.

HP Inc. division will consist of its imaging and printing group and personal systems group, and also retain the iconic blue and white logo of HP. Currently, these divisions map onto our Printer and Ink cartridge, and PCs, Workstation & Others division. Together, these divisions make up 35% of HP’s estimated value. By clubbing PCs and printer businesses together under one unit, HP hopes to achieve synergies by cross selling its products to clients. The transaction will be effected through a tax-free distribution to HP shareholders, and is expected to complete by the end of FY15. The precise ratio of new to existing shares has yet to be determined as does the date.

Launch of Laptops and Tablets To Strengthen Presence In Mobile Hardware Industry

One of the key trends in the PC industry has been a decline in the average selling price (ASP) of desktops and laptops over the past few years that started with the slump in demand of PC. As demand (both replacement and new demand) faltered, manufacturers engaged in price wars, that drove ASP lower. Since hardware is commoditized (i.e., it is difficult to distinguish amongst manufactures as similar laptops have similar technical specs), customers buy the cheapest option available. The intense competition in the PC industry resulted in HP launching products with new capabilities such as gesture control etc. While we expect that the stagnation in the global PC market could continue to affect HP as the upgrade wanes, we believe HP has taken some prudent steps such as the launch of new advanced thin clients at lower prices, to ensure that it maintains its market share. Additionally, HP recently launched new variants of its tablets. HP hopes that with these launches it will be able to gain traction in a marketplace in the coming year and mount competition against the favored Google’s Chromebook and the tablets of Apple and Samsung. The successful launch of tablets is important for HP as it not only addresses one of the biggest emerging opportunities in the hardware space, but also fills the missing product offering in its product portfolio. We believe that HP’s tablet will be able to capture a sizable chunk of this growing tablet segment and drive revenue growth going ahead.

Initiatives For Boosting Services Division

HP continues to report double-digit growth in revenues of its strategic enterprise services such as cloud, mobility, security and big data. [2] We believe that cloud services are potentially the biggest new revenue source for HP in 2015. The HP Cloud is based on OpenStack and is a direct competitor to Amazon Web Services. Some of the services are HP Cloud Compute, HP Cloud Object Storage and HP Cloud CDN. These services are based on pay as you go pricing. Converged cloud infrastructure built on technologies like converged storage, software-defined networking and the Moonshot server platform will power cloud computing by seamlessly integrating big data analytics and security. HP announced several new cloud services and cloud professional services based on its technology to bolster its cloud presence and feed business into its channel. It continues to work closely with its channel partners to improve their cloud go-to-market and delivery capabilities.

Recently, the company has also announced the launch of HP Helion Network, a global open network designed to provide customers with an unparalleled portfolio of services and the ability to create a secure hybrid IT environment that addresses local and global requirements. HP Helion incorporates existing HP cloud offerings, new OpenStack technology–based products, and professional and support services under a unified portfolio. The company also plans to invest more than $1 billion over the next two years on cloud-related product and engineering initiatives, professional services and expanding HP Helion’s global reach. [3]

Printer Segment To Get A Reprieve From 3-D Printer Launch

Printer division was a major source of profit for HP last year, as it implemented ink advantage program for medium and small companies. This division contributed nearly 80% to operating profit of the proposed HP Inc in 2013. Printing business has been stagnant for the past two years as more people are storing photos and files online, and view them increasingly on their phones and tablets. However, it has received a reprieve in the last quarter, buoyed by pent up demand in the commercial segment. HP has been innovating in this segment by launching low-cost multi-function printers (MFP), which enable a user to do multiple tasks such as copy, scan, print, etc., that require less ink. Since HP is a leader in 2-D printer industry, its now plans to launch itself into 3-D printer industry, which is a natural progression of its 2D printer business. Although, the company has not disclosed much about the product that might be introduced, it said that it will first target “enterprise” customers, which are comprised of businesses, government agencies and other organizations. [4] While it is too early to speculate, we believe that most of the revenues from 3D printer will come from ink sale rather than sale of unit printers, primarily due to the fact that as adoption of 3D printing gains traction, manufacturers will require more ink.  We believe that this offering will boost HP’s printer sales in the coming year.

We presently have a $31.33 price estimate for HP, which is 23% below the current market price.

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Notes:
  1. HP Announcement []
  2. 10-K []
  3. HP Launches HP Helion Portfolio of Cloud Products and Services, May 06 2014, www.hp.com []
  4. Read more about the upcoming offering here []