Why Hewlett-Packard Can Still Soar

HP investors were not happy that the company's latest results showed it's still relying heavily on traditional businesses. However, the company's foray into 3D printing could help levitate shares since 3D stocks have proven to be popular with investors.

Feb 28, 2014 at 4:00AM

Tech giant Hewlett-Packard (NYSE:HPQ) managed to deliver an earnings beat in its latest earnings call, but investors were hardly impressed by the results. HP reported a $0.90 EPS for its first-quarter of fiscal 2014, 10% better than the year-before earnings, and well above the consensus estimate of $0.84 per share.

Although the company's revenue edged 1% lower than the previous year's comparable quarter to $28.2 billion, it was, nonetheless, better than the consensus estimate of $27.19 billion. HP's PC division, which has long been in the doldrums, managed to move up 4%, which further helped to buttress the popular opinion within industry circles that PC sales for major vendors could be bottoming out. But, HP's crowning glory was its otherworldly $3 billion free cash flow for the quarter, far above the sell-side analysts' estimates of $500 million-$1 billion.

So, why are HP's investors trying to pick a bone with the company after its latest results, the first time it has managed to grow its bottom-line in ten straight quarters? Why does Goldman Sachs, an influential financial analyst, still rate HP a strong "sell?" Could investors be missing something? Does the recent slide in the company's share price, which has been triggered by those results, signal the end of the stock's impressive 75% surge in 2013, or the extra 8% the shares had gained this year?

Meanwhile, HP's 3D printing peers, Stratasys (NASDAQ:SSYS) and 3D Systems (NYSE:DDD), are bracing themselves for HP's foray into the sector sometime in mid-2014.

HP's weak points
HP investors squawked that the company's positive results were primarily driven by good performance in the traditional businesses that it's trying to walk away from, and also as a result of effective cost-cutting. HP's enterprise group, which consists of the company's server business, managed to edge up 1%, while its operating margin remained stable. This group is one of HP's most important, since it accounts for 45% of the company's profits.

HP has been undertaking drastic restructuring and aggressive cost-cutting measures that have, so far, produced cost savings of about $1 per share.

The not-so-good news is that enterprise services revenue tumbled a disturbing 7%, while the operating margin for the division plunged to just 1%. Enterprise services is one of the sectors that HP is hoping will become the engine that drives new growth in the company. Printing revenue was down 2%, while operating margin for the sector fell 90 basis points from 17.7% to 16.8%.

Revenue from HP's software division, its other hoped-for source of future revenue growth, slumped a worrying 4% year-over-year, with its operating margin sliced in half from 30.8% to just 15.8%.

HP is currently in the throes of drastically restructuring its core businesses. The company is trying to move into new businesses such as enterprise software, 3D printing, the cloud, cyber security, and big data. Meanwhile, it's trying to chuck its older, non-performing businesses such as PC sales.

In short, the company is trying to do a lot of really tough stuff that cannot be accomplished with a simple makeover, while trying to wrap up a number of unprofitable businesses.

Although HP is undoubtedly getting closer to the becoming company it would like to become in the future, it simply has not gained much traction in its new growth areas. But, that's perfectly understandable, given the company's sheer size and the Herculean tasks at hand.

New promise
HP has, once again, set its eyes on 3D printing after its unsuccessful partnership with Stratasys back in 2010. Many HP investors have not been optimistic about this new business. But, the market for 3D printing is much larger than most people imagine. However, the market is highly fragmented with many applications that are unknown to the average consumer.

The dominant players in the industry are 3D Systems and Stratasys. Both companies have been targeting 3D printing service bureaus, while subsequently expanding their core business offerings. HP's Chief Executive, Meg Whitman, suggested on the company's latest earnings call that HP intends to offer hardware to facilitate much faster printing times at competitive prices. Current and future 3D printing service providers will be HP's potential clients.

Investors began selling off shares of both 3D Systems and Stratasys after HP's announcement, a clear recognition of the huge threat that the giant printer manufacturer could potentially pose to their businesses.

Both companies, however, still kept most of their earlier gains, with 3D Systems' shares up 120% year-over-year and Stratasys' shares 92% during the same period. Although 3D printing will be just another of HP's myriads of businesses, it's 3D Systems' and Stratasys' lifeline.

Foolish takeaway
Only time will tell if HP will make money from its 3D printing business. But, 3D printing stocks have proved to be hugely popular with investors, as evidenced by the massive gains they made last year. 

HP shares, therefore, stand to benefit from the firm's entry into 3D printing, as well as from its excellent free cash flow and highly effective cost-cutting measures, which will ensure the company does not run into high-cash burn rate problems as it continues to restructure.

Get in early on the 3D printing revolution
For the first time since the early days of this country, we're in a position to dominate the global manufacturing landscape thanks to a single, revolutionary technology: 3D printing. Although this sounds like something out of a science fiction novel, the success of 3D printing is already a foregone conclusion to many manufacturers around the world. The trick now is to identify the companies -- and thereby the stocks -- that will prevail in the battle for market share. To see the three companies that are currently positioned to do so, simply download our invaluable free report on the topic by clicking here now.

Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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