Suffering from a substantial downturn in 2011, Hewlett-Packard (HPQ) is starting to recoup some of its double digit declines as it prepares for a rocky start to 2012.
Although there is optimism that significant ground can be made up in the upcoming fiscal year, the first quarter has been more of the same for the printing and personal computer giant. Financial results for the first quarter that ended on January 31, 2012 show a 30% decrease in net revenue for HP from the first quarter of 2011. All major facets of HP shouldered this decrease with HP's Personal Computer sales leading the decline by reporting $8.9 Billion in net revenue, a 15% decrease from 2011.
However, despite these stagnant first quarter results, there is hope on the horizon that should attract investors to its current discount price and, in my opinion, will result in substantial payouts to investors by the end of 2012.
Despite the wide spread decline in profits that saw HP shares reach 52 week lows of $23 in October, 2011, the news was not all bad as it still managed to report an overall operating profit of $9.7 Billion. Although HP's recently appointed CEO, Meg Whitman has been cautious in her financial projections for 2012, the news of HP remaining financially profitable is a positive sign for its continued positive growth.
Although significant competition is being placed on Hewlett-Packard from companies such as Apple (AAPL) who, in large part due to the expansive popularity of its iPad tablet, is projected to overtake HP by the middle of 2012 in total Personal Computer Sales. However, despite Apple's substantial presence, there is still money to be made in the personal computer market.
The most recent Telework Research Network statistics continue to show significant increases in individuals who regularly telecommute. In 2008 it was reported that 40%, or approximately 16 Million of all businesses in the United States were home based. Further, 40% of employees stated that their jobs could be performed from home. As a result, 42% of employers claim that they have allowed their employees to work from home during certain times throughout the year, a 30% rise from 2007.
The increase in employees working from home is largely attributed to the continued rise in gas prices, which in 2008 surpassed the $3.75 per gallon mark. Further, the continued development of broad band internet has allowed employees to easily access their work files from almost any location. This change in work place has placed less of a demand on self sufficient employees need to work at a centralized office. Instead it is my opinion, based on these numbers and the advancements in home office technology, along with gas prices at the same levels as 2008 that construction of home based offices will continue to increase .
As a result of the increase in home based offices, employers will continue to see the potential financial incentives in increasing its home based employees. The increase in such employees will assist in the reduction of central office space that will reduce the overhead expenses associated with running such an office.
For the 1st quarter of 2011 it was reported that HP held a 42.4% share of the printer market, a 10.5% increase from 2010 first quarter results. This data comes off a strong showing in printer sales for the 4th quarter of 2010 that reported 36.5 million units sold a 7% growth from 2009. Inkjet printers accounted for 24.5 Million of printer sales.
With these new trends in mind it is evident in my opinion that the demand for inexpensive personal computers, a product that HP prides itself on and the demand for home printers will yield a substantial increase in sale volume for these highly profitable products. As further evidence of continued profitability, HP has designed its ink cartridges in a fashion that makes interchangeable ink replacement to HP printers near impossible. As a result, HP has cornered the ink market by offering a wide range of cartridges at almost any office supply store and will reap the benefits of home based professionals seeking replacement cartridges on a more regular basis.
Considering that HP printer, ink and computer sales amount to approximately 50% of its total sales it is easy to draw the connection that as more people are allowed to work from home, HP products, which are catered for personal use, will see a significant increase in demand.
On the legal front, HP's lawsuit is still in litigation mode with Oracle (ORCL) where they allege a breach of an implied contract when Oracle refused to fix servers that were designed in cooperation with HP. The lawsuit alleges that instead of working on the servers as it agreed to do, it forced consumers to purchase its newly designed servers that are not compatible with HP products.
HP alleges that it filed the suit in the interest of its customers and to ensure fair competition in the server industry. Despite the litigation, HP still holds a 29.3% share in the server market, well above Oracle, that currently holds a 6.2% share.
Although HP's suit was filed in the best interest of its customers, competitors such as IBM, have benefited significantly from the pending lawsuit as it recently surpassed HP in holding the highest server market share at 30.5%.
Meanwhile, Oracle has been placed in a tenuous situation as a result of the lawsuit and its inability to compete with rivals IBM, SAP and HP in the hardware market. With Oracle's failure to make significant gains in the hardware market, it has been reported that it has consistently failed to reach projected earnings, a trend that has subjected its share price to increased instability in the last 52 weeks.
Despite the difficult 2011 and low financial projections for 2012, it is my opinion that HP, with its broad range of profitable products and its ability to remain competitive in all product lines will allow it to increase dividend payouts for the remainder of 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.