Hewlett-Packard: Printers More Valuable Than PCs

Mar.28.10 | About: HP Inc. (HPQ)

HP (NYSE:HPQ) is a leading provider of printers, ink and PCs to both consumers and businesses. Some of HP’s most popular PC brands are Pavilion, Compaq and TouchSmart, while its popular printer offerings include LaserJet, Officejet, InkJet and Photosmart.

We estimate that HP’s printers and ink cartridges business constitutes 26% of the $53 Trefis price estimate for HP’s stock while the company’s notebook and desktop PC business accounts for only 16% of our estimate.

Below we explain why HP’s printers and ink business is more valuable than the PC business and how a 5% increase in printer market share results in a 4% upside to the Trefis price estimate for HP’s stock.

Printers and Inks versus PCs

Our estimate for the value of each HP business typically depends on three important factors: market share, market size and margins. In comparing HP’s printer and ink business to its PC business, market share and margins are two of the most important differences.

1. Higher Printer Margins

Although printers themselves are low margin products, HP’s high margins on printer ink result in overall margins that are higher than that of the PC business. We estimate that HP’s printers and cartridges EBITDA margin has risen consistently from about 17% in 2005 to 22% in 2009.

In comparison, margins for HP’s notebooks and desktops have been half the PC business margins. For example, we estimate that notebook margins for HP have increased from 5% in 2005 to 9% in 2009.

You can modify the forecasts for printers & cartridges margin and notebook PC margin to see how HP’s stock price would be impacted if its notebooks margin were to grow at a faster rate than its printer margin, in contrast to our forecast.

2. Higher Printer Market Share

HP’s market share within the printer market is about double its desktop and notebook PC market share. HP’s share in the printer market was 40% in 2009, while its desktop market share was 19% and its notebook market share was 21%.

5% Increase in Printer Market Share Would Mean 4% Upside to HP’s Stock

HP’s stock is more sensitive to changes in its printer business than changes in the notebook business. A 5% increase in HP’s printer market share will lead to a 4% upside to $53 Trefis price estimate for HP’s stock, while a 5% increase in HP’s notebook share will result in less than a 3% upside.

You can modify the forecasts above to see how HP’s stock price would be impacted if its notebooks market share were to overtake its printer market share in the future.

For additional forecasts and analysis, here is our complete model for HP’s stock.

Disclosure: No positions