H-P Is Bucking the Gloom in the Printer Industry

H-P had been losing market share to Xerox and Lexmark, but now it seems to be gaining it back.
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Investors hate red ink, especially when it comes from printers.

Xerox

(XRX) - Get Report

and

Lexmark

(LXK)

, big makers of printers and printing accessories, both fell sharply early this week after issuing warnings about future earnings. The Lexington, Ky.-based Lexmark lost $3 billion off its market capitalization after losing a staggering 28 points, or 30%, Monday. Even though the stock gained 7 3/16 Tuesday, investors are still concerned about a slow product transition and the Y2K problem.

The king of the printer business,

Hewlett-Packard

(HWP)

, also fell about 4 points Monday and another 4 1/2 Tuesday over similar concerns about its own printing business. On the Street, the conventional wisdom is that if Lexmark and Xerox are hurting, then, so should H-P. After all, new H-P CEO Carly Fiorina warned on Oct. 1 of weak North American Unix server sales and Taiwan supply shortages. Since then the stock has dribbled down 19% and is now hovering 35% lower from its Sept. 10 level.

But H-P may be getting an unfair rap. In fact, the troubles at Lexmark should in part be blamed on a revitalized H-P printer division, which Fiorina says is having its best quarter in years and should register 15% year-over-year revenue growth. "Don't you think that might have something to do with the problems at Lexmark and Xerox?" asks an H-P executive who requested anonymity.

In the first half of 1999, Xerox and Lexmark were eating away at H-P's printer market share, according to Riley McNulty, an analyst at

International Data

. But in the third quarter, it seems, H-P made a comeback. From June to August of this year, Xerox's unit share slipped to 0.6% from 0.7% of the $1 billion printer market, according to market tracking firm

NPD Intelect

.

During these same three months, H-P pocketed 65.4% of the dollars spent on printers and equipment, up from 63.5% in June 1999. Although Lexmark market share did not slip, H-P should benefit from Lexmark's anticipated production problems in the fourth quarter. The NPD Intelect data includes all channels, including discount, superstores and resellers.

"H-P's market share levels seem to be rising in both ink jets and laser jets," says an analyst at

ZD Market Intelligence's StoreBoard

, who spoke on the condition of anonymity because his firm's third-quarter numbers haven't been published yet.

"It's been a boom year for H-P and its laser printers," says Ed Pullen, printer industry analyst for

Venture Market Strategies

, a San Jose-based consulting firm. Pullen estimates that by the end of 1999, H-P will register a 42% increase in laser printer sales. Not bad since high-margin laser printers make up 63% of the company's total printer sales (including supplies and equipment), but it only makes up around a third of total units sold. Lexmark, on the other hand, has struggled in this area, and sales will be flat year-over-year in 1999, according to Pullen.

"H-P remains the dominant franchise player in digital hardcopy

ink jet/Laser/scan," says Richard Chu, an analyst with

SG Cowen

, who rates H-P a strong buy. Chu notes that H-P's growth in high-margin areas will accelerate. SG Cowen has not done any recent H-P underwriting.

Printers will make up around 35%, or $17.5 billion, of the company's $50 billion in total sales this fiscal year ending Oct. 31, according to Neal Martini, senior vice president of H-P's LaserJet division. At an expected growth rate of 13% to 15%, the printer division could very well help H-P make up for shortfalls in other divisions, notably Unix, which has come under fire for underperforming. H-P's total Unix business will come in at around $5 billion in expected sales this year.

Demand should continue to be robust, according to Martini, who adds that H-P sees no downturn in printer orders related to the Y2K problem. Instead, H-P is seeing new growth areas in the midrange laser printers. "The company is seeing impressive triple-digit growth here," says

Merrill Lynch

hardware analyst Steve Milunovich, who rates H-P a long-term accumulate. Milunovich notes H-P's laser printer sales rose 30% in August 1999, quite a recovery from a 13% drop in sales in June. His firm acted as an H-P underwriter.

H-P's color printing business is a good example of how much share H-P is taking from its competitors. Two years ago, the company's market share was less than 50%. Now it controls almost 80%, according to StoreBoard. "Our color printing business has tripled in volume in the last year and is very healthy," says Martini, who admits color is presently just a small percentage -- about 375,000 units, according to StoreBoard -- of total printer sales but is growing rapidly.

Small or not, H-P's color laser printers are adding black ink to the bottom line.