Why H-P Loves Printer Ink - TheStreet

Why H-P Loves Printer Ink

H-P's services and printers businesses are its most profitable, generating more than 50% of the company's total profit.
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By Trefis.com

Hewlett-Packard

(HPQ) - Get Report

is the world's biggest PC manufacturer, ahead of players such as

Dell

(DELL) - Get Report

and

Acer

. However, H-P's services and printers businesses (specifically printer ink) are the most profitable, and together generate more than 50% of the company's total profit.

Consequently, H-P Services is the most valuable division for

H-P's stock

followed by its Printers & Ink Cartridges division. We estimate that services and printers combined contribute around 62% of the

Trefis price estimate of $54 for H-P's stock

.

Below we discuss these two divisions in detail and why they are most valuable to H-P.

H-P Services: Most Valuable Division (29% of H-P revenues, 35% of profits)

H-P became a big player in the outsourcing industry with the $13.9 billion acquisition of EDS in 2008. H-P's service division provides outsourcing and consulting services to its business customers, through which it generated more than $34 billion of revenues in 2009. The highest revenue contribution was from Infrastructure Outsourcing ($16 billion) followed by Technology Services ($10 billion).

Services revenues constituted 29% of H-P's revenues in 2009 and we expect it to increase to around 34% by the end of the Trefis forecast period. We estimate that revenues from Infrastructure Outsourcing will grow to nearly $21 billion while Technology Services revenues grow to $13 billion over our forecast period.

Services contributed more than one-third of H-P's profit in 2009 with

EBITDA (profit) margins of about 19%

. The higher services margins are attributable to the absence of hardware, manufacturing and raw material costs faced by H-P's PC, server, storage, networking and smartphone businesses.

Printers: H-P's Second Most Valuable Division

The significance of H-P's printer business is attributable to two factors:

1. H-P's high market share in worldwide printer market

H-P dominates the global printer market and accounts for around

40% of total printers shipped

. According to research firm IDC, H-P's closest rival, Canon, accounts for only 17% of printer shipments.

We forecast H-P to remain the dominant player in the global printer market due to its wide distribution network and strong relationships with corporate clients.

2. High profit margins associated with printer cartridges

The majority of profits in the printer business come from sales of highly profitable ink cartridges. Generally, printer manufacturers sell the hardware at little or no profit and then generate strong profits from the recurring sales of ink cartridges.

Due to strong cartridge sales, H-P's printer division has remained one of the most profitable businesses for H-P. In 2009, the printer business contributed about 29% of H-P's total profits with

EBITDA margins of about 22%

. We expect H-P's printer business to sustain these margins going forward and hence generate strong cash flow for the company.

You can see the complete

$54 Trefis Price estimate for HP's stock here.

Trefis

is a financial community structured around trends, forecasts and insights related to some of the most popular stocks in the U.S.