Why HP’s PE of 8 Might Not Scream Buy: Printers and Toner an Obsolete Technology?
A number of research firms have come out with forecasts that show the rise of the smartphone, largely led by the iPhone, and the emergence of the tablet, like Apple's iPads, are erasing some of the need to print out content to confer with colleagues. Fewer pages printed means less demand for higher-end, higher-margin LaserJet toner and inkjet printing cartridges, HP’s cash cow.
Barron’s Tech Daily Trader sums up some recent estimates, including by Barclays Capital's Ben Reitzes, who believes HP is likely to be hurt the most by what he sees as a 3% drop in the inkjet market in 2012.
Morgan Stanley came out with a report a year ago calling the impact on printing caused by the rise of tablets the "most underappreciated cannibalization story," and estimated a 2%-5% drop in demand for printing supplies in 2012.
HP had already warned that intense competition in the printer market, coupled with the rise of companies making knock-off toner and printer cartridges, could hurt margins in its Imaging and Printing Group, or IPG, it's third-largest unit in the year ended Oct. 31.
In its fiscal first quarter results, for the period ended Jan. 31, the company added soft demand for ink to the problems, underscoring industry research that the market for printing is shrinking. But HP's printing unit seems to be falling faster than estimates for the overall industry.
IPG revenue slid 7% in the first quarter to $6.26 billion, while operating revenue dropped 32% to $761 million. Of course, the printer division wasn't the lone weak link: PC sales fell 15% and operating profit in that unit dropped 31%. Falling sales don't help HP’s profit margin .
The question investors will want to know is whether HP CEO Meg Whitman can wring enough cost savings by merging the PC and printer units to make up for the potential structural shift away from printing. Not to mention the battle she has on her hands in the ever-commoditizing PC business.
Can HP be like International Business Machines (IBM), which abandoned the PC market early as competition heated up and was reborn as a higher-margin, more profitable consulting business?
Amid all this restructuring, can HP get back its innovative edge to power new high-margin growth? The company has said its business model is based on providing innovation and high-quality products, yet its research spending has been relatively flat over the past several years at around 2.5% of revenue. Whitman acknowledged this to shareholders this week, vowing to boost R&D.