This article was written by Gabriel Rodan, a Financial Analyst at I Know First.

Summary

• Stock is defined by noticeably low valuation in the context of it’s business sectors
• Has a prominent PC segment with higher revenues than its Printing segment but Printing has more important contribution to bottom line
• Earnings growth opportunities and expansion based on increasing proliferation within the global printing industry
• 23% discount from previous high represents buying opportunity according to I Know First’s proprietary algorithm.

Business Overview

Hewlett Packard is a provider of technologies, solutions, services, and other products to individual consumers, and both small and large businesses that include those in government and education sectors. The Company provides personal computing and other access devices but the bulk of its business is in imaging and printing products, and related technologies and services. Its core segments are Personal Systems, Printing and Corporate Investments which incubate and prototype products. Personal Systems offers Commercial and Consumer desktops and other related accessories, software, services. The Commercial branch is for institutional use and includes the HP ProBook and HP EliteBook lines of laptops. On the other hand Consumer PCs are for consumer usage and any personal use. These products include HP Spectre, HP Envy,and HP Pavilion. These products are all prominent in both the B2B space and for direct consumers. HP made $37,661,000,000 in revenues from its Personal Systems sector in 2018 and the remaining $20,805,000,000 of revenue came from the Printing sector.

Key Trends-Growth Opportunities

Hewlett Packard is a big name in both the PC market and the Printing Market but a look at the company’s bottom line reveals the real story. Hewlett Packard is a story about printing and increasing proliferation in the global printing market which is worth roughly 1 trillion dollars. Although 64.4% of its revenues come from its PC segment (Personal Systems) and only 36.6% of its revenues come from Printing. Printing has a much higher operating margin and has a lopsided contribution to operating income as visualized in the chart below.

In 2018, Printing had a 16% operating margin, compared to the PC segments operating margin of 3.7%. This notable difference can be attributed to the low margins of selling PC hardware as opposed to the high margins of printing supplies such as proprietary ink cartridges which essentially serve as a cash cow for the company. The company’s sluggish performance this year can be attributed to stagnant services and a glut in the supply channel.

As mentioned, printing is almost a 1 trillion dollar global industry and will continue to be the company’s bread and butter. Within the printing space, Hewlett Packard’s diversified portfolio of products will be key further proliferation that will drive growth. These key segments within printing include, personal and industrial applications, 3D printing, stitch printing, and other B2B solutions.

Market Risks

One glaring risk for investors is that is that they are in the space of printing in an era of digitalization which has lead to caution and is a reason they are valued at low multiples and are not a growth stock. Since the industry is relatively stagnant, they can only increase through growing market share and product offerings. Luckily, the printing sector is inherently diverse and a significant portion of it is not threatened by digitalization. In particular, print associated with consumer products. Hewlett Packard’s success will be contingent on successful execution of their go-to-market strategy and continued development of innovative products and services. Hewlett Packard is currently one of the leaders in terms of market share depending on how you stratify the market. In the worldwide large format printer market HP sells 34.8% of units which represents 21.4% of the market value. This is due to them selling their printers at cheaper rates than the industry average to purposely inflate their units in the market and therefore long term demand for their ink cartridges. These printer supplies are the core of their business and they purposely subsidize some of their printer products to increase their share of printers. I expect this to continue and believe they will increase their market share across the printing market in the foreseeable future with this strategy.

Valuation

Hewlett Packard is currently trading at a P/E of 8.35, P/S of .55, and EV/EBITDA of 5.42 which is a notably low valuation. This fundamentally have to do with their business model. It is priced as a mature business in a mature industry which is appropriate given their core business is printing and specifically printing supplies which does not have growth prospects to warrant high multiples. Its EPS for the 2018 fiscal year was 3.26, notably higher than previous years which has to do with increasing proliferation in the printing space and success in clearing their supply channel specifically for printing supplies. 

Some of Hewlett Packard’s competitors in the computer hardware space are Dell, Lenovo, and Asus but given that the core of Hewlett Packard’s business and most significant contributor to the bottom line is the printing equipment and supplies segment, the best financial comparison can be made with Epson which has similar operating margins and expansion prospects within the printing industry. Epson is among the largest manufacturers of computer printers and imaging related equipment and has a similar product portfolio to HP’s printing segment which is their crown jewel and key money maker. Epson trades at a P/E ratio of 12.9 but is much smaller, with a market cap of 5.6 billion compared to the 31.32 billion dollar behemoth that is Hewlett Packard. Given their current positions in the Printing and PC market and their expansion opportunities, one can deduce that HPQ can be valued fairly at a higher earnings multiple than what it is currently at but not such that it tops Epson’s valuation multiples. Conservatively, assuming an earnings multiple of 10.5x and the consensus projected EPS estimate of $2.17 per share for the fiscal year ending in October of 2019, HPQ stock would warrant a price of $22.78 per share within the next year. Comparing it to other large competitors such as Canon and Konica Minolta yield similar results as they trade at higher valuations and have P/E ratios of 13.6 and 12.9 respectively.

Technical Outlook for Hewlett Packard Stock

Hewlett Packard is currently trading at $20.79 which represents a roughly 23% drawdown from its high at 27.08 last October. Before then, the stock traded in a strong upward trend since February of 2016 in tandem with the market. Following a bad earnings release in February of this year that caused a 16% crash, it has been consolidating within the 18-20.4 range and has recently broken above this range into a trading gap which is a bullish signal. The next bullish price target would be at a previous support of $22.3. 

I Know First Long Term Bullish Forecast for Hewlett Packard Stock

This is the I Know First HPQ stock prediction for the next year. It currently has a positive outlook with a signal strength of 102.27 and predictability indicator of 0.78.

Past I Know First Successes with Hewlett Packard Stock

On December 14, 2016 I Know First made bullish HPQ stock prediction for the next year and HPQ rose over 44% in that timeframe.

This Bullish stock forecast on Hewlett Packard was sent to current I Know First subscribers on December 14, 2016.

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Please note-for trading decisions use the most recent forecast.