(Print the Legend, Netflix)
The International Data Corporation recently predicted that worldwide three-dimensional (3-D) printing sales are to double by 2020. This would represent an annual compound growth rate of some 24.1% if met. In return, 3-D printing companies returned flat post-announcement on Aug. 19.
(MakerBot 3-D printer in 2014, CNBC)
In fiscal year 2015, the leading 3-D printing companies in current times were Stratasys (SSYS, Financial) with 34% global market share, 3D Systems (DDD, Financial) with 16%, EOS (privately held German company) with 13%, SLM Solutions (AM3D, Financial) with 4% and Arcam (ARCM, Financial) with 3%.
Not included in the market leaders and just starting to sell its own 3-D printer products was HP Inc. (HPQ, Financial). In May, the company began taking orders for its 3-D technology, Multi Jet Fusion.
(HP Multi Jet Fusion™ technology, Company Website)
The 69-year-old computer systems company seemed to be a little late on this printing technology; nevertheless, it claimed that its 3-D printing technology is 10 times faster than its current peers. Hewlett Packard claimed that its printer would cut printing cost-per-part in half. The company also provided statements leading to comparable prices compared to its 3-D printer peers.
(Hewlett Packard 3-D printing lab, Wall Street Journal)
With these statements, HP, no doubt, would want to be the great disrupter of the 3-D printing industry. In addition, the company had formed co-development and strategic partnerships with several leading manufacturers including Nike (NKE, Financial), BMW (BMW, Financial), Johnson & Johnson (JNJ, Financial), Jabil (JBL, Financial), Siemens (SIE, Financial), Materialise (MTLS), Shapeways, Autodesk (ADSK, Financial), and Protolabs.
Here is Hewlett Packard’s 3-D Technology video presentation:
Mostly, demand for 3-D printing technology would increase in businesses producing prototypes and customized, low-volume manufactured consumer products. According to 3DPrint.com, the manufacturing would induce more growth in the evolving industry. Make no mistake; 3-D printing has been around since 1984.
Going back, manufacturing businesses, such as the automotive, aerospace and defense industries, already contributed some $6.4 billion in sales this year. The IDC predicted overall 3-D printing sales would reach $35 billion by 2020 with a forecast of $15.9 billion in 2016.
Joining the 3-D technology would surely be exciting for HP as it further grows its business. In contrast, most of the market leaders in the business were actually losing big money in recent times.
In fiscal year 2015, the market leader, Stratasys, lost $1.37 billion after including a $942.4 million goodwill impairment charge brought by weaker and increased uncertainty in the 3-D printing environment. 3D Systems, meanwhile, recorded a loss of $663.9 million after having a $537.18 million intangible asset impairment charge. Nonetheless, both market leaders  probably still would have delivered losses absent these write-offs.
On the other hand, both market leaders had good gross profit margins prior to 2015. From 2010 to 2015, Stratasys and 3D Systems both had 49% in gross profit margins. Only in operational expenses had both companies struggled to yield more profits.
In their respective annual filings, Stratasys had 49% growth in its research and development (R&D) expenditures. Stratasys’ R&D contributed 22% to its operating expenses, absent any impairment charges. 3D Systems also saw its R&D expenses grow by 23% and had contributed 13.9% to its expenses last year.
Both, and probably other-related 3-D printing companies as well, are probably on their toes figuring out how to further develop their products while anticipating HP’s arrival in the market. HP has been teasing of delivering a 3-D printer for the last two years.
Hewlett Packard
In November last year, Hewlett Packard separated itself into two companies: Hewlett Packard Enterprises (HPE) and HP Inc.
According to its annual filing, HP offered several products and services. These are personal computing and other access devices, imaging- and printing-related products and services, enterprise information technology (IT) infrastructure, multi-vendor customer services and software products and solution. The company put together detailed reported segment information on these segments for its annual filing.
(Read HP Inc.’s recent annual filing here: HP Inc. Annual Report)
In 2015, Hewlett Packard’s personal systems, enterprise group and printing-related products contributed most in its overall sales. These segments contributed 29%, 26% and 20% respectively.
Interestingly, personal systems, which includes sales from notebooks, laptops and workstations, had a profit margin of 3.38%. HP’s enterprise group, meanwhile, delivered a margin of 14.26%, and printing business with 18.2%. It surely will be interesting to see the printing business margin once 3-D printer sales are to be included in Hewlett Packard’s filings.
Sales and profits
On Aug. 24 Hewlett Packard delivered its third quarter earnings results. The company reported a -3.8% change to $11.9 billion in sales and -8.31% change to $783 million in profits. As a result, its shares were down 4.5% after hours. Observably, sales for its 3-D printing business were not included.
Overall, Hewlett Packard had a five-year (2011-2015) sales and profit growth average of -3.9% and -12.3%. This increases the pressure for HP to have success in its 3-D printing business.
Cash, debt and book value
As of July 31, Hewlett Packard had $5.6 billion in cash and $6.8 billion in debt. The company had an undefined debt-equity ratio brought by its negative shareholder equity and book value, which both are currently standing at -$3.9 billion.
Cash flow
(Hewlett Packard Cash Flow Statement, Annual Filing)
In 2015, Hewlett Packard almost halved (-47%) its cash flow from operations. Several things occurred in its operations that led to the remarkable reduction.
Nonetheless, the company allocated $3.6 billion in its capital expenditures, leaving it with $2.89 billion in free cash flow. Also, Hewlett Packard had allocated some $2.64 billion of its cash flow in relation to acquisition of Aruba Networks (ARUN).
Here are some statements the company provided regarding its purpose for its Aruba Networks acquisition:
"Aruba is a Sunnyvale-based industry leader in wireless networking with approximately 1,800 employees. The company had revenues of $729 million in fiscal 2014 and has reported compound annual revenue growth of 30% over the last five years.
"Aruba boasts a highly regarded innovation engine and specialized sales, marketing and channel model, complementing HP's leading networking business and go-to-market breadth. Together, HP and Aruba will deliver next-generation converged campus solutions, leveraging the strong Aruba brand. This new combined organization will be led by Aruba's CEO Dominic Orr and Chief Strategy and Technology Officer Keerti Melkote, reporting to Antonio Neri, leader of HP Enterprise Group. With this move, HP will be uniquely positioned to deliver both the innovation and global delivery and services offerings to meet customer needs worldwide."
Further, Hewlett Packard spent $4.1 billion in both dividends and share buybacks in 2015. The company also reduced its debt by $15.87 billion while issuing another $20.76 billion in debt.
Valuations
According to GuruFocus data, Hewlett Packard has a trailing 12-month (ttm) price-earnings (P/E) ratio of 7.6 times (industry median of 18 times) and price-sales (P/S) ratio of 0.35 times (industry median of 0.93 times). The company also sponsors a ttm dividend yield of 3.8% with a 25% payout ratio.
Conclusion
Given the current findings in Hewlett Packard’s balance sheet, prospective investors must wonder whether the company would eventually produce retained earnings again to generate positive book value and equity.
Current investors can only hope that Hewlett Packard can still cut costs until it sees a turnaround in its printing and personal systems business as these two contributed almost half (49%), or $52.7 billion, of its sales last year.
The 3-D printing business definitely is an exciting prospect. Reviewing sales growth in both the current top players (Stratasys and 3D Systems) in the industry revealed that growth has slowed down, but IDC turned so bullish in its recent announcement that this probably will be the beginning of another momentum of growth in the industry.
These conflicting and possibly speculative findings may then produce uncertainty in prospective investors. For the meantime, it would be better for conservative investors to watch Hewlett Packard to turn its business, especially its printing segment, around prior to buying its shares.
For aggressive investors, on the other hand, Hewlett Packard’s already discounted valuation may present an opportunity for long-term appreciation. In the long-term, the company’s current dividend handouts also would add up to overall return in the investment.
Disclosure: I am long Hewlett Packard.
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