There's no getting around the fact that computer and printer company HP (HPQ -0.25%) dished out a disappointing second-quarter report earlier this week. Revenue fell short of estimates due to a marked decline in PC sales. The stock price tumbled 6% in response to the news, despite the company's bullish forecast for the latter half of the year.
In some regards, the setback is a buying opportunity for interested investors. From another vantage point, though, last quarter is a look at the company's likely lackluster future. More than anything, however, HP's second-quarter report is finally forcing investors to acknowledge what the company is ... and isn't.
Printing is where the profits are
As a recap, for the three-month stretch ending in April, HP turned $12.9 billion in revenue into an adjusted per-share profit of $1.07. The top line fell nearly 22% from the year-earlier figure of $16.5 billion, and it fell short of analyst estimates of $13.1 billion. The bottom line beat estimates of $0.76 per share, although it still slumped 31% from the year-ago second quarter's comparison of $1.20.
The real story here, however, is the specific reason last quarter's numbers were so weak. Printer and printing supply revenue fell 5% year over year, while PC sales plummeted 29% to only $8.2 billion.
And this is where things get interesting. Personal computers are by far this company's biggest sales driver, accounting for nearly two-thirds of last quarter's sales; printers and related supplies made up the other third. And those are fairly typical proportions.
However, printing's pre-tax profit of nearly $900 million is roughly two-thirds of the company's total pre-tax income, versus PC's contribution of only $445 million. With the exception of the surge of PC sales prompted by the pandemic, those are relatively typical proportions as well.
Data source: HP. Chart by author.
That's the good news and the bad news for all current and would-be shareholders. The PC sales slump doesn't mean a whole lot to the bottom line, as PCs haven't been a core profit center for HP in years -- printing is where the profits are.
Data source: HP. Chart by author.
The problem? There's no real growth on the horizon for the printing business, and perhaps for HP as well.
HP's big profit driver is hitting a wall
Yesteryear's dreams of a paperless office (and home) obviously never came to fruition. It's not exactly a stretch to say, however, that we've already reached "peak paper."
A forecast from Global Market Insights puts things in perspective. The research firm believes the print toner market is set to grow at a modest annualized pace of only 4.5% through 2032. That jibes with a forecast from Dataintelo calling for compound annualized growth of 5.5% for the ink and toner cartridge market for the same time frame. Mordor Intelligence puts the number closer to 2.5%.
It doesn't really matter which one of the outlooks is most accurate. They're all relatively anemic, modeling growth that barely outpaces inflation.
And things may not even be that good for HP. Technology market researcher IDC reports that during the fourth quarter last year (and for a second quarter in a row), HP lost printer market share to rivals like Canon, Epson, and Brother, each of which gained share on a year-over-year basis.
HP is still the market leader, accounting for roughly one-third of worldwide printer sales. Nevertheless, consumers and corporations buy ink and toner that work with their particular equipment. If they're not buying HP printers now, they won't be buying HP ink cartridges later.
Don't make HP something it isn't
Don't freak out if you own HP. Even with the dual headwinds, it remains a cash cow. There are enough HP printers still out there and enough of its printers still being sold (nearly 8.7 million in the final quarter of 2022 alone, according to IDC) to drive sales of the company's ink and toner for years to come.
And margins for the printing business are relatively huge. Only 5.4% of last quarter's PC revenue was converted into profits, whereas 19% of the company's printing sales reached the bottom line. It's unlikely that printing's profit margin will change much from here. It is strong support for this stock's current quarterly dividend of $0.2625 per share, with plenty of room left over for future dividend increases or unforeseeable turbulence. The subsequent dividend yield of 3.4% is pretty compelling, too.
The challenge is that the printing-driven dividend is the only thing really going for HP stock -- now, and likely in the future. There's not enough potential on the PC front to suggest HP will ever really be a growth company again.
As for the artificial-intelligence-centric computers being touted as growth drivers for the company's second half of 2023, HP's upwardly revised profit guidance of between $3.30 and $3.50 per share for the year is still well below last year's bottom line of $4.08 per share.
Just keep it all in perspective.
