HP Prepares Long-Term Wagers -- WSJ
August 22 2016 - 3:03AM
Dow Jones News
By Don Clark
Growth has always been golden in Silicon Valley, and HP Inc.
hopes to prove it isn't the only definition of success.
Analysts expect the former Hewlett-Packard Co.
printing-and-personal-computer business to continue a recent
pattern of revenue declines when it reports quarterly financial
results on Wednesday, the latest evidence of waning demand for
those products.
Yet HP's shares are up 22% on the year, outpacing the broader
stock market and other mature tech companies such as Microsoft
Corp., Intel Corp. and International Business Machines Corp.
HP's stock-market cachet is linked to its generation of cash,
which has fueled outsize dividends and the potential of share
buybacks that could further boost its stock price. Highlighting
those attributes for investors was one motivation for separating
the company from the more growth-oriented entity now known as
Hewlett Packard Enterprise Co., said Dion Weisler, HP's chief
executive, in a recent interview.
The original HP, a technology pioneer founded in 1939, had
developed finely tuned practices to monitor sales and profit, said
Cathie Lesjak, HP's CFO. Putting equal attention to the balance
sheet and cash flow "is new muscle for almost everybody in the
company," she said.
Not that Mr. Weisler isn't laying plans to get HP growing again.
But he said the company's business creates financial breathing room
to place bets that may take years to pay off.
HP, the second-largest PC maker behind Lenovo Group Ltd., gets
most of its revenue from sales of those products. That market has
been shrinking, but cash flow from the business remains very
strong, Mr. Weisler said. One reason is that HP takes in revenue
from customers significantly faster than it pays suppliers of
components to build the systems it sells, he said.
More than half of HP's profit comes from printing, primarily
sales of ink and toner that generates a steady flow of cash.
The dynamics have enabled HP to pledge to investors that it will
return 50% to 75% of its free cash flow -- the amount remaining
after capital expenditures -- to shareholders in the form of
dividends and buybacks. The company has estimated it will generate
$2 billion to $2.3 billion in free cash flow for the fiscal year
ending in October.
Toni Sacconaghi, an analyst at Sanford C. Bernstein, wrote in a
note that HP's current 12.4 cent quarterly dividend amounts to
about 30% of free cash flow, so could be increased. Mr. Sacconaghi
said HP's 3.4% dividend yield is already among the highest of
publicly held companies.
Still, shrinking revenue remains an issue, particularly for HP's
printing business. Steven Milunovich, an analyst at UBS Securities,
predicts HP will report a 15% third-quarter decline in revenue from
its supplies business compared with the year-earlier period, with
printer sales down 9%.
In all, he expects quarterly revenue to fall 8% to $11.4 billion
and net income to drop 23%.
Mr. Weisler hopes to spur growth by building a franchise beyond
desktop-oriented inkjet and laser printers toward the bigger
copying and printing systems that serve entire departments. In a
longer-term bet, the company has announced plans to enter the newer
market for 3-D printers.
In PCs, Mr. Weisler said, HP plans to focus on growing,
profitable segments such as high-end gaming systems and premium
laptops while avoiding low-margin, me-too products such as low-end
tablets.
Some progress emerged in the second quarter. Market researcher
International Data Corp. in July estimated HP's global quarterly
shipments rose 5.1%, despite a 4.5% drop in the total market. In
the U.S., shipments rose 11.5%, IDC said.
"I'm interested in growth," Mr. Weisler said. "But I'm much more
interested in profitable growth."
Write to Don Clark at don.clark@wsj.com
(END) Dow Jones Newswires
August 22, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Microsoft (NASDAQ:MSFT)
Historical Stock Chart
From Aug 2024 to Sep 2024
Microsoft (NASDAQ:MSFT)
Historical Stock Chart
From Sep 2023 to Sep 2024