August 5, 2019 BARRON’S 15
FouryearsaftertheoldHPwassplitup,thePCandprintingbusinessistrying
tosheditslegacywithsomebignewideas. ByEricJ.Savitz
HPInc.IsStillPrinting
BigBucks,andMore
T
HE HP LABS BUILDING IN PALO ALTO IS THE
SiliconValleyversionofIndependenceHall,
one of the places where the revolution
started.Builtin1966,theSpaceAgeedificeholds
the preserved offices of Bill Hewlett and David
Packard, who founded HP 80 years ago. But the
time-capsule belies HP’s major renovations.
In2015,thecompanywassplitintwo.Thereare
now two HPs on the New York Stock Exchange.
HewlettPackardEnterprise (ticker:HPE)makes
servers,storagearrays,andotherthingsthatcon-
sumerswillneversee.Thatcompanyisheadquar-
tered in San Jose, Calif., leaving the original Palo
Altocampusto HPInc. (HPQ),whichmakescom-
putersandprintersforconsumersandbusinesses.
HP Inc. is the bigger of two, with a market
valueof$30billion.Thisyear’srevenueshouldbe
closeto$59billionwithnetincomeof$3.4billion,
or $2.18 a share, up 8% from fiscal 2018.
PCs—mainlylaptops—dominateHP’sbusiness,
accounting for 64% of April quarter sales. In the
U.S.,HPleadswithcloseto30%share,according
to Gartner, just ahead of Dell Technologies
(DELL),withLenovoandApplefarbehind.HPis
gainingshareworldwide,whereithas22%ofthe
PCmarket.Gartnersayssecond-quarterglobalPC
marketunitswereup1.2%,withHPunitsup2.6%.
Butwhenitcomestoprofits,theHPstoryisall
aboutprinters.Theyaccountedfor70%ofprofits
in the latest quarter. IDC says that HP is the
global printing market leader. Printer revenue
comes from three sources: commercial printers,
homeprinters,andsupplies.ButasBernsteinana-
lystToniSacconaghinotes,morethan100%ofHP’s
profits come from supplies. HP Inc. is HP Ink.
That explains the investor panic earlier this
yearwhenHPdisclosedaspeedbumpinconsum-
ables,assomeEuropeancustomersshiftedtobuy-
ing knockoffs and remanufactured ink and toner
from third parties online. While HP had been
expectingconsumablesalestobeflattomodestly
higher,itnowprojectsa3%drop.Thattriggered
a 17% swoon for the company’s stock on the last
dayofFebruary.Therehavebeenotherissues,as
well: tight supplies of Intel processors and U.S.
tariffs on laptops manufactured in China.
Thestockisnow15%belowitsFebruarypeak.
It should recover those losses over time. HP
sharestradeatlessthanninetimesearningsesti-
mates for the coming year, making it the sixth
HP HPQ•NYSE
Source:Bloomberg
2017 ’18 ’
15
20
$
cheapest name in the S&P 500 Info Tech sector.
(Sibling HP Enterprise fetches less than eight
times.)
HP yields 3.2%, among the most generous in
tech,andthecompanycontinuestobuybackstock.
Sincethebeginningoffiscal2018,HPhasrepur-
chased 177 million shares, more than 10% of its
outstanding stock. In the latest quarter, HP re-
turned$936millionindividendsandbuybacks.For
now,investorsareoverlookingthegenerosityand
pricing in minimal growth.
Onthesuppliesissue,CEODionWeislerison
awarfooting.HPisboostingitsonlinemarketing,
gettingaggressiveonbrandprotection,andtight-
ening inventory controls. UBS analyst John Roy,
who has a Buy rating on the stock, wrote in a
recent research note that “the supplies issue is
likely in the rearview.” He has a $28 price target
on the stock, 40% above the recent close of $20.
Weislerseesthreenear-termgrowthopportuni-
ties,andonelong-termwildcardthatcouldchange
everything.OneopportunityisA3printers,those
bigprintersandcopiersthatarehavebecomecen-
tralresourcesinlargeoffices.It’sabigmarket—
about$25billionayearandmorethantwicethat
whenyouincludeserviceandsupplies—whereHP
historically has been a minor player. HP jump-
started those efforts in 2017 with the $1 billion
purchase of Samsung’s printer business.
Weislerseesanotheropportunityincommercial
graphics—specializedprintersforsigns,packages,
publications, and textiles, a $30 billion market
where HP is just starting to be a factor.
And he’s accelerating the company’s push into
“as-a-service” models for both printing and com-
puting, shifting to an offering with more predict-
able costs for customers and more reliable reve-
nues for HP, while reducing the likelihood that
customers will buy third-party supplies. HP’s
InstantInkallowscustomerstopaybythepage.
(Pricesrangefrom$3for50pagesamonthto$
for 700 pages.)
HP’s big bet revolves around 3-D printing.
Down in the bowels of HP Labs, the company is
workingoncutting-edgehardwarethatcanprint
partsorentireproductsfromscratch—andthey’re
gradually expanding from plastics to metals. HP
has alliances with Siemens, BASF, and Jaguar
LandRover.Thecompanyhassetbiggoalsaround
automotive and industrial manufacturing.
The3-Dopportunityhastakenlongertocome
togetherthanoriginallyhoped.Multiplepureplays
inthebusinesshavestruggledtogettraction,and
HP doesn’t see a material earnings impact for
another three to five years. But the promise to
disrupttraditionalmanufacturingstillholds.Imag-
inetheefficiencyofprintingautopartsondemand,
ratherthanrelyingonacomplexnetworkofware-
houses and distributors. HP’s deep knowledge in
printingalongwithconnectionstoenterprisecus-
tomers put it in a better position to succeed than
earlier entrants.
HPhasonceagainbecomeabetondisrupting
globalbusiness—somewhere,HewlettandPackard
are smiling. Gary Musgrave
$59.
2020E Revenue (bil)
$2.
2020E EPS
8.
2020E P/E
0.
2020E Price/Sales
3.2%
Dividend Yield
Note: Fiscal year ends Oct.
E=Estimate
Source: BloombergKEY DATA
$20.
Recent Price
$30.
Market Value (bil)