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Robert Stephens
Robert Stephens, CFA
Articles (84) 

HP’s Innovative Strategy Could Catalyze Its Stock Price

The company’s business model appears to be improving rapidly

October 05, 2018 | About:

The strategy being pursued by HP Inc. (NYSE:HPQ) has the potential to enhance its competitive advantage. Acquisitions are set to provide a platform to deliver greater investment and growth in the contractual offers print markets. A continued focus on 3-D printing may allow the business to disrupt the $12 trillion global manufacturing industry.

The company continues to invest in a product pipeline that has an increasing focus on premium products. Higher average sale prices could boost sales growth while investment in its products may hurt margins in the short run, but could result in a more profitable business in the long run.

Although HP’s stock price has risen 28% versus 14% for the S&P 500 in the last year, further outperformance of the index could be ahead.

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Investment strategy

The acquisition of office equipment dealer Apogee Corp. for $505 million could provide synergies for HP. It is Europe’s largest independent provider of print, outsourced services and document technologies, and could help to expand the company’s managed print services. It has a particular focus on small and medium-sized businesses, and provides the platform for greater investment in go-to-market capabilities.

The acquisition follows the purchase of Samsung’s (XKRX:005930) printing unit last year, with the two takeovers expanding the growth potential of the business in the A3 multifunction printer, document services and A4 laser printer segments. With capabilities in contractual sales, Apogee could provide HP with accelerated growth in the contractual offers print markets.

HP’s increasing focus on the 3-D printing market could allow it to disrupt the $12 trillion global manufacturing market. The company has been able to drive installations with industrial-grade customers, with a new 3-D printing center in China providing access to the world’s largest manufacturing market.

The 3-D printing market provides an increasing breadth of opportunity across a number of verticals, such as health care and automotive industries. A strategic partnership with Siemens could provide a competitive advantage in the full-color 3-D printing industry, with the tie-up providing the required design support software.

Product potential

HP has been able to realize higher average sale prices in its hardware products in recent quarters. The company has focused on higher-end products within the PC and notebook market, with its pipeline of new products suggesting this trend will continue. It is seeking to drive innovation and growth across its premium pipeline. For instance, it has boosted its OMEN brand within the gaming segment through the launch of a range of accessories, while its newest OMEN laptop has proved popular among customers.

The company is also seeking to become more innovative through the introduction of new products in its retail segment. Its HP Engage retail point of sale portfolio provides retailers with additional layers of security in what is a versatile platform. Its graphics segment is also benefitting from strategic initiatives, with new products such as the DesignJet Z large-format printer having the potential to catalyze its future growth rate within an industry where quality and efficiency are becoming increasingly important.

Potential challenges

In the company’s most recent quarter, it reported a 20-basis point fall in gross margin. It declined to 18.4%, with non-GAAP operating expenses increasing by 15% to $1.6 billion. Alongside a falling gross margin, the company also faces a potential threat from tariffs, which are set to be implemented over the coming months. Although a full-scale trade war may be avoided, the International Monetary Fund has estimated that even if no further tariffs are put in place by the U.S., China and other countries, the tariffs which have already been announced could reduce global gross domestic product by 0.5% by 2020.

The company’s gross margin, though, was hit by the acquisition of Samsung’s printing business, as well as the investment being made in growth and future initiatives. Further short-term costs could be experienced in the near term, resulting from the acquisition of Apogee, while investment in the company’s 3-D printing capabilities may also cause a further reduction in gross margin. In the long run, the investment being made could create a more profitable business with higher growth potential. Although a full-scale trade war remains a threat, a price-earnings ratio of 9.5 suggests the stock offers a margin of safety.

Outlook

Investment in its product pipeline alongside a focus on products with higher average selling prices could yield higher profitability for HP. Although the gross margin declined in the most recent quarter, this is largely due to the investments the business is making in its 3-D capabilities, as well as in acquisitions. These two areas could provide it with accelerated growth in the contractual sales segment, as well as an increasingly disruptive presence in the global manufacturing industry.

HP is becoming an increasingly innovative business, which has a greater breadth of opportunity across a variety of product verticals. Although its shares have outperformed the S&P in the last year, they appear to offer investment potential.


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