What Does 3-D Printing Hold For HP?

Apr. 3.14 | About: HP Inc. (HPQ)

Summary

HP's first quarter results were better than last year’s operations. While sales remained relatively stable, bottom line improvement was attributed to one-time items which led to EPS growth of 17%.

The 3-D printing industry is on the rise. Manufacturers such as Nike are getting involved and it offers tremendous potential for the falling printing division of HP.

Expiring patents will allow easy transition into the 3-D printing market, along with the company’s expertise and distribution channel.

These factors will bring top line growth in the long term boosting overall profits.

Hewlett-Packard Co (NYSE:HPQ) was once a not so attractive company in the eyes of investors. Throughout 2012, the company lost its share value by more than 40%. However, the beginning of 2013 has brought a new uptrend to stockholders and share price has appreciated more than 50% over last year. The printing division has recently shown a great amount of future potential, thanks to the innovative 3-D technology that is likely to support the increasing share value in the future. Let's have a look at this trend in this article and see how HP performed during its first quarter of 2014.

The First Quarter

While HP saw its 2013 revenue decline by 6% to $112 billion, the quarterly result showed some improvement, with overall sales remaining relatively stable and decreasing by a slight 1% to $28 billion year over year. That figure was actually positive (0.3%) if measured on a constant currency basis. The decline was primarily due to key account runoff in its enterprise services in the U.S., partially offset by the previously announced sale of the company's portfolio of mobile computing intellectual property (IP).

Since these were one-time events, a better structure mix will ensure that a more suitable top line is achieved in the future. India remained strong for the company, with stabilization also being realized in mature markets such as Germany and France. HP observed year over year volume increases in departments such as PS and EG, which account for more than 50% of revenue.

Gross margin improved by a slight 50 bps to 22.8%. While some of this was due to the sale of IP mentioned above, HP experienced an operational improvement as a result of margin enhancement in printing, due to favorable currency impacts along with a better inkjet supplies mix. This was complemented with efficiencies in service delivery of ES. Stable margins were a noteworthy effort on HP's part given the competitive pricing environment across the industry.

The operating margin increased 90 bps due to the gross margin increase, lower SGA and level of intangible asset amortization expenses. The reasons for the smaller SGA expenses were a gain from the sale of real estate and cost savings linked with HP's ongoing restructuring efforts that were partially offset by higher litigation-related reserves. Although cost savings will persist, some special gains are likely to push future SGA decreases at a lower rate than recently observed.

The net result was diluted EPS of $0.74, up 17% from a year ago. While this result was satisfactory to some extent, there is the possibility that the not so successful segments will push these figures perhaps at an even much higher rate in the future; of those not so successful segments I am specifically referring to HP's printing division. Last quarter, printing saw its revenue decline due to lower volumes of toner supplies, lower average revenue per unit (ARU) and unfavorable currency impact.

But this might not be the case in the years to come. The company has recently announced plans to enter the commercial 3-D printing market by the end of 2014. The 3-D printing market (also known as additive manufacturing, rapid prototyping or direct manufacturing) is on the rise and is becoming widely accepted as a factor that will change manufacturing methods globally.

Why 3-D Printing Will Be A Game-Changer

Since it reduces the need to maintain and operate factories that have significant capital requirements, the combined end-user spending on 3-D printers industry wide grew 43% to $412 million in 2013 compared to 2012. According to Gartner, the spending will grow 62% this year reaching $669 million, with enterprise spending of $536 million and consumer spending of $133 million. Total number of units to be shipped will increase to over 98,065 in 2014 from 56,507 last year. It is expected that this figure will double in 2015.

To share an example of why this is happening, athletic goods manufacturer Nike (NYSE:NKE) is presently developing shoes for events like the Super Bowl and the upcoming World Cup using 3-D technology, but that's just the commercial side of the industry. Though it is difficult to create a time line, technology progression both in hardware and software, along with lower input costs and complications involved in making 3-D printed products will trigger its prospects in mass markets such as architecture, defense, jewelry design and medical goods. This is why the sale of 3-D printing products and services (which includes printers and ink products) is expected to grow $10.8 billion by 2021.

HP's move is well timed and it should benefit from the events above. This is because a lot of patents held for 3-D printing, such as the apparatus for producing portions by selective molding, have either expired or are expiring within a year. Therefore, HP won't have to shell cash on R&D for developing 3-D business and temporarily affect its bottom line. The cash reserves of more than $16 billion can be spent to make investors happy through buyback or improve the current running of the company.

Bottom Line

Though everything is at an early stage right now the transition into 3-D printing will be easy for HP. The expertise it holds, combined with distribution channels and supplier relations are going to help the company upgrade from 2-D to 3-D printing. Printing accounts for nearly 20% of the company's total revenue. While last year's results were above the industry, 3-D printing will provide a further boost to the top line once the company establishes itself in the domain. The long-term prospects, therefore, look fruitful and I recommend buying the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.