HP Inc (NYSE:HPQ), the mass production unit of the old Hewlett Packard Enterprise Co (NYSE:HPE), is up almost 18% since it last reported earnings in February. Those numbers, $611 million in net income, 36 cents per share, on revenue of $12.684 billion, fully covered 13-cent-per-share dividend for HPQ stock, which yielded 2.79% at the company’s opening price on May 22.
The top-line growth was significant, almost $1 billion more in sales than the same quarter a year ago. But a year ago, the same quarter also generated $629 million in net income for HP.
This may be why the price-to-earnings ratio for HPQ stock remains a modest 12.5, in a market where the average stock trades at 18.
For the quarter being reported Wednesday, analysts are expecting earnings of 39 cents per share, hoping for a penny more and looking at $11.93 billion in sales.
The story is that HP is slowly consolidating the printer market, where it holds one-third of the market, and that it now leads in PC sales.
HPQ Stock and the 3D Hope
If there is hope for real growth at HP, it will be found in 3D printing, or additive manufacturing.
When the company announced it would make 3D printers, in late 2014, the main players in that market, 3D Systems Corporation (NYSE:DDD) and Stratasys, Ltd. (NASDAQ:SSYS), were worth two and three times more than they are today, respectively.
The collapse of that market occurred while HPQ was readying its Multi-Jet Fusion for the market, so that now, as it unveils its global reseller program as well as a network of service bureaus and product design houses, the product category is largely ignored.
Expectations are modest, but not at HP. The company insists it is about to severely disrupt a $12 trillion manufacturing market by delivering lower-cost feedstock of materials beyond plastic. The goal is to create end-user parts at production-level scale and the company says it is in the market for the long haul.
The key point is that this is no longer a hobbyist market, but a professional market, for manufacturers who can pay $100,000 to $300,000 for a production level machine. Gone are the days of dripping globs of plastic onto single-foot “build planes.” The company can now make products from multiple materials, in multiple colors, with an open materials platform that traditional manufacturing suppliers will fill.
HP: Dividend Now, Growth Later
For HPQ stock bulls, this means you’re buying a stodgy manufacturer that carries within it the chrysalis of a growth company.
The argument has sent the stock up 28% so far in 2017, taking it below the 3% yield mark that would interest dividend investors. But that price is not yet justified by the company’s overall growth rate.
The good news is that the company’s balance sheet can wait on that growth. Long-term debt is down to $6.78 billion, while the company had $6.33 billion in cash on hand in January, and that number has been steadily rising since it was spun-out of what is now Hewlett Packard Enterprise.
While HPE has looked like the better investment, if you go back to the October 2015 split, that is because HPE, under former HP CEO Meg Whitman, took what seemed like most of the attractive assets. Since January 2016, the gains in HPQ stock have tripled those of HPE.
It reminds me of what happened when oil producer ConocoPhilips (NYSE:COP) split off its refinery operations as Philips 66 (NYSE:PSX). Everyone expected the oil producer to shine, but instead it was the refinery operation that turned out to be the better investment.
HP is the refinery operation of the old Hewlett-Packard, and by far the better investment.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
