Reviewing Hewlett Packard’s Performance In 2016

Hewlett Packard Incorporated (NYSE:HPQ) operates in two of the most commoditized markets, i.e. the PC market and the Printer and Peripherals market. Nevertheless, HPQ’s performance in FY16 was better than expected, as it not only launched a host of new products, but also leveraged these launches to generate more revenues and outperform the underlying industries. Additionally, following its separation from HP Enterprise (NYSE:HPE), the company was able to improve its focus on the remainder of the business. In this note, we explore the HPQ’s performance in 2016.

For precise figures, please refer to our full analysis for Hewlett Packard Incorporated

New Launches In The PC Segment Augurs Well For The Company

The Personal Systems division is the company’s second largest division and makes up 46% of its stock value. The secular decline in the global personal computer industry continued in the first nine months of the year, and is expected to decline further in the fourth quarter.  According to IDC, the global PC shipment declined by over 6.6% in the first nine months of 2016, while HPQ’s personal computers division revenues declined marginally by 1.77% in the same time frame.

HPQ was able to outperform the industry by selling more PCs during the period. However, average sales price for the company continued to decline, due to a shift in mix and competitive pricing. Going forward, HPQ is well positioned in the PC market as it continues to launch premium and mid-tier PCs at competitive prices. Specific models include the Elite Slice, the EliteBook with privacy screen, the OMEN gaming, the Chromebook 13, the Pavilion Wave, and the Spectre x360. This should help the company to report revenue growth in the ensuing quarters.

Additionally, the company is selectively focusing on the high-end premium segment of the market that has resulted in improvement in HPQ’s margins. In the past three years, its operating margins have improved by 90 basis points to 4.2%.

Going forward, we  expect that its share of the market, which increased to 21.2% in Q3, will continue to improve. Furthermore, we anticipate that as the company focuses on the higher end of the market, its revenues will also improve in this quarter and into 2017.

Printer Segment Suffers As Change In SCM Strategy Dents Growth

HPQ’s printer division is its largest division and makes up 55% of its estimated stock value. In the first half of 2016, the secular decline in printer hardware continued as shipments have declined by over 7.3%. However, HPQ’s revenue have declined by 12.3% to $13.62 billion despite the improvement in hardware sales. Moreover, ASPs grew both sequentially and year over year, driven by both mix and pricing.

The decline in revenues can be attributed to decline in sales of channel inventory as the company has changed its supplies model, which continued to impact channel inventory. Going forward, we expect that as the company continues to tweak its supply chain management strategy, its supplies revenues will continue to negatively impact revenues in 2017 too.

The company made a significant announcement in September that it would buy Samsung Electronics printer business for $1.05 billion. This transaction is expected to close by the end of calendar Q1 2017 (FYQ2 2017). This would help the company to report growth in printer revenues for FY2017.

We continue to monitor HPQ’s business in 2017. However, since the underlying industries are witnessing a secular downtrend, we estimate the revenues to decline in 2017, albeit at a slower rate than the industry. At present, we have a $14.88 price estimate for the stock, which is 11% below the current market price.

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