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Summary

  • Decline in revenues is primarily because of the shrinking PC market that has decreased with the advent of tablets and internet-supportive smart devices.
  • Shipments in EMEA totaled 22.9 million units in the first quarter of 2014, indicating a 0.3% rise, after posting plummeting growth for the past eight quarters.
  • Analysts predict that the 3D printing market is expected to realize an annual growth rate of 30% p.a. in the coming years.

Hewlett-Packard Company (NYSE:HPQ) has been fighting the decline in revenue for the past eight consecutive quarters. The company extracts money from a number of segments that are indicated in the graph below. Printing and personal systems were grouped together by the company, wherein this group alone accounts for 50% of the company's revenues. Take a look at the following charts/graphs to discern the segment- and geography-wise distribution of the net revenues of the company.

Source: First Quarter Earnings Release Presentation

The aggregate revenue of the company has declined by 7% YoY, compared to a 5% decline last year. Top line growth remained stagnant for a few years, before it started trending downwards. Year-end figures indicated that all segments showed negative performance, with a decline in sales in personal systems (-10%) and enterprise services (-8%) being the most significant. The results released at the end of the first quarter of 2014 eased up the pressure across some segments. Although Personal Systems has edged up, Enterprise Services continues to show negative performance. Take a look at the following table to see the performance of each segment throughout the latest quarter.

Source: First Quarter Earnings Release Presentation

Where did the Top Line Underperformance Come From?

The decline in revenues is primarily because of the shrinking PC market that has decreased with the advent of tablets and internet-supportive smart devices. Companies whose revenues are driven heavily by PCs have found themselves facing the perils of a rapidly contracting market. With the end of the first quarter of 2014, IDC reported that PC shipments have declined by 4.4% YoY, compared to analysts' expectations of 5.3%. Analysts suspect that the growth of traditional PCs is now approaching stability as consumers and businesses align their usage patterns with the relevant devices.

Will Traditional PCs Evaporate?

Going forward, the declining growth of the PC market will eventually come to a standstill as it approaches maturity; however, a complete eradication of the market is rather unlikely in the foreseeable future. Take a look at the following table segregating current and projected device shipments (in millions) to understand the declining PC sales and increasing tablet and mobile device sales.

Source: Gartner (March, 2014)

With Microsoft (NASDAQ:MSFT) putting an end to Windows XP, a number of consumers have been upgrading their systems to stay in line with supported operating systems. This OS migration is expected to benefit PC sales through 2014. With HP still enjoying a 25% market share of the PC market, the company's margins are expected to show a positive movement this year.

PC Sales as per Geography

HP once used to be a top player in the U.S. However, with the dawn of wireless and internet-supportive devices, the company began to lose its mark, as it failed to step forward in a timely fashion. There is no arguing that the company made bad decisions, but the fact remains that it is still one of the leading technology companies. That being said, some geographical locations have finally begun to post positive growth after a declining trend for about two years.

According to Gartner, "shipments in EMEA totaled 22.9 million units in the first quarter of 2014," indicating a 0.3% rise after posting plummeting growth for the past eight quarters. Windows XP has been one of the reasons driving this positive change. HP realized 15.3% YoY growth in EMEA PC sales throughout the first quarter of the present year. Note that the company maintains a top share in the market in the region, with Lenovo (OTCPK:LNVGF) following close behind.

(click to enlarge)

Source: Gartner

In the U.S., professional PC spending has risen as well, since the economic environment has showed improvements leading to higher spending levels by businesses and government.

Where is HP headed?

HP has cut down its capital expenditures, which in turn, boosted its free cash flow figure. The company's free cash flow figure has increased by about 22.5% YoY at the end of FY2013. HP is utilizing this surplus cash flow to pay off its debt and to reward shareholders through share repurchases. A reduction in the total number of shares outstanding bolstered the stock market performance of the company, leading to a 17.3% rise in the stock price since the start of this year. However, it would be wrong to attribute the rise in stock price to share repurchases alone. Apparently, investors are also highly optimistic about the new 3D printing (3DP) venture of the company, and rightly so. The company enjoys a 40% market share in the 2D printer market as of 2013 figures, therefore the company can easily establish a foothold in the 3D market. With 3DP spending projected to grow by 62% this year alone, analysts predict that the market is expected to realize an annual growth rate of 30% p.a. in the coming years. Up until now, the 3DP market was relatively owned by smaller companies. HP's entry will not only help the fledgling industry, but will also highly benefit the company's margins.

Furthermore, the company projects to cut down its operational costs by downsizing its employee count by 30,000 by the end of this year.

Concluding Remarks

In my opinion, the company is undervalued, with a P/E ratio of 11.88, compared to the market's P/E ratio of 15.97 and a forward P/E ratio of 8.45. The PC market is gaining strength again, and the 3DP market is expected to create high growth in the coming years, both of which will positively impact the top and bottom lines of the company. HP's balance sheet is getting stronger as well. The company maintains a healthy level of cash flow, and is efficiently utilizing it to pay off its debt and reward shareholders.

Source: Hewlett-Packard: Gaining Strength With The Market