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Investment Overview for HP (NYSE:HPQ)
Below are key drivers of HPQ's value that present opportunities for upside or downside to the current Trefis price estimate for HPQ:
HP Printer and Ink Cartridge
- HP's Market Share : HP's market share has fluctuated between 38-42%. However, the company has been able to maintain its leadership position in the printers industry through new product launch and focus on Multifunction printer. Moreover, it continues to offer its products at competitive price points. As a result, it has been able to keep the competition, especially from Japanese manufacturers at bay. We currently forecast that its market share will improve to ~40% on the back of new products and competitive price points. There could be 13% upside to Trefis price estimate if its market share were to increase to 45%. However, it could be 10% lower if the market share were to fall to 36%.
- Printer Ink and Toner supplies price : Supplies prices have been trending downwards as non-OEM manufacturers are remanufacturing or refilling cartridges to cut cost. However, HP's original supplies still have a premium over the locally available supplies. Trefis currently forecast the average supplies cost to decline to $49.1 as the premium between non-branded and branded supplies shrinks. However, if prices were to rise to 2015 levels there could be 10% upside to Trefis's price estimate.
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 19.6%. If market share were to grow to 23%, there could be 10% upside to Trefis price estimate. However, there could be a 13% downside to the Trefis price estimate if HP's market share were to fall to 15% in the future.
HPQ is known by consumers primarily for its PCs and printing products. While it leads the world in printer industry, it lost its #1 position to Lenovo in the PCs markets. In order to cut costs and improve profitability, it has restructured its manufacturing process in 2014. It further restructured its business in 2015 by splitting the company into two i.e. Hewlett Packard Incorporated and Hewlett-Packard enterprise in order to improve the focus on its different business verticals.
Huge Printing Business
HP is the global leader in the printer market with over 39% share in printer units sold globally as of 2015. The company posted $20.3 billion revenues with 19.5% margins. 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 ~55% of its value from the printing business
HP is the global leader in the PC market
HP is the second largest PC vendor in the world with over 18% market share in 2015. The company derives nearly 45% of its value from the PC business (the Personal Systems Group or PSG). Although, the company witnessed over 18% decline in desktop business and 6.6% decline in laptops business, it continues to be amongst the leaders. Its revenue from laptop business declined at a slower pace than the industry. The company reported revenues worth $30.4 billion in 2015 and wafer thin margins of 5.1%, which is indicative of the intense competition in the industry. With HP now committed to reviving 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 new products that capture user mind share.
Competitors such as Lenovo have surpassed HP in many segments, but it is still one of the top players in the global PC market.
Moore's law to increasing computing at a reduced cost in PCs. Competition to further impact prices of PCs.
As the complexity of an integrated circuit increases, so does its computing power that too at a lower price point. As a result, the price per computing for PC will continue to decline. Furthermore, as competition amongst player is intense in this industry, the price of PCs, in general, are expected to decline in the coming years.
Increasing popularity of Smartphones
Smartphones have taken the smart connected devices market with a storm. The shipment for smartphones exceeded 1.4 billion in 2015. Smartphone sales are cannibalizing sales of PCs as these devices now have similar capabilities as a PC, and the advent of cloud has made it possible to share resources and capabilities with the powerful server. Thus, to some extent, replacing the need for PCs.
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. Additionally, penetration of tablets in the corporates has led to an increase in adoption. We believe that this trend will continue as both phone and PC manufacturers like Samsung, Microsoft, HP and Dell continue to launch new tablets.
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. While HP has not been able to increase its market share significantly, if HP manages to increase its market share there could be a tremendous upside potential to the firm.
Secular decline in printer hardware
Printer hardware industry is witnessing a decline in shipments as companies now prefer to store and share most documents through cloud service. Furthermore, managed printer services (MPS) for printing needs is now the prevalent norm in the industry. This is impacting printer hardware industry as most of the MPS deploy multi-function printers (MFP), and the sales of MFP have done well compared the Printer hardware industry.
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 22.5% in 2014. In 2015, intense competition drove margins lower to 19.5%
We expect margin to decline as we expect some fall in hardware revenue caused by reduced consumer and business spending on hardware due to the advent of cloud based services.
Trefis considered the following factors for its forecast:
Back to Company Overview
- 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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