In the great bull market of 2013, it wasn’t hard to be a stock picker — it seemed as if every stock, with the exception of a select few, was soaring to new heights. But of 2013′s many winners, Hewlett Packard was one name that seemed poised for a fall from grace in 2014. “I don’t know if there is a person alive who doesn’t expect there to be fewer printers sold next year and fewer PCs sold next year than last year and last year was terrible for them,” Jeff Middleswart, a senior analyst at Ranger International, told Forbes’ Sam Sharf in December.
However, after beating the Street with its first quarter 2014 earnings results — posting $28.2 billion in sales against a $27.2 billion consensus and earnings of 90 cents per share against an 85 cents per share consensus — Thursday afternoon, HP is now giving its skeptics some room for pause, and even leading some analysts, like Citi’s Jim Suva, to declare that HP could still soar in 2014.
“Although HP shares are up 8% this year (while the S&P 500 is flat) following last year’s 101% gain, we still see a 34% total return within the next 12 months and reiterate our Buy rating,” Suva writes in a new research report, adding that he sees 11 reasons why HP could continue to trade even higher. Chief among these reasons are HP’s stronger cash flows, earnings per share that are poised for growth and, most interestingly, HP’s potential to gain a foothold in the 3D printing landscape.
HP reported $3 billion in first quarter cash flows, a figure that Suva calls “a real surprise,” especially against sell-side analysts’ expectations of cash flows of $500 million to $1 billion. The $3 billion figure, Suva argues, “provides adequate funds for stock repurchase, dividends, and smaller strategic M&A,” which he predicts will come on the software and services side of HP’s business.
Though HP posted nine consecutive quarters of year-over-year earnings-per-share declines, Suva says that the 10% increase from the 82 cents per share in the first quarter of 2013 to the 90 cents per share reported for first quarter of 2014 gives reason to believe that HP’s EPS will continue to grow. Suva points out that the PC maker raised the low end of its full-year 2014 EPS outlook to $3.60, up from $3.55, while Citi Research predicts full year EPS will come in around $3.80 thanks to cost-cutting, stock buyback and improved PC and printing trends. Take this prediction with a grain of salt, though: Suva admits that the $3.80 figure is the highest on the Street.
Most of Suva’s other nine reasons outlining why HP stock could continue to climb this year are relatively tame — investor sentiment on both PCs and the printing landscape is too negative, revenue declines are slowing and HP management is regaining credibility, to name a few — but his eleventh reason echoes a December report from Jefferies in predicting that HP, bellwether of the old-school printing industry, could eventually prove to be a worthy competitor in the new-school world of printing: 3D printing.
“At HP’s Security Analyst Meetings on October 9th, the company commented that is assessing the 3D printing market. We did not give much weight to the comment as our experience recalls that HP was in a partnership with 3D printing maker Stratasys back in 2010 and this effort was largely unsuccessful,” Suva writes. “However, we recognize the 3D market is gaining traction in recent years and on the HP earnings call the CEO stated that HP will enter the 3D market [this fiscal year] via internal investments.” Citi Research is not building any revenue from 3D printing into its HP revenue model, which means that any meaningful sales from a 3D printing initiative would be, essentially, a pleasant surprise.
Whether or not HP actually makes any money from its 3D printing efforts, the stock stands to benefit. 3D printing stocks have proven to be popular with investors: 3D Systems, the leader of the group, is up 120% year over year; Stratasys is up 92% and ExOne is up 77%. If HP were to really make a splash in the 3D printing industry, it could very well see some of that favoritism extended to its own shares.