HP : FITTER FOR PRINT

[Anonymous]

H-P: Fitter for
Print
Hewlett-Packard has found itself in the middle
of a price war of its own making, with the technology giant putting its star
business unit on the line as it attempts to hold on to control of the printing
market.
Lexmark International  , H-P’s main competitor in the printing
industry, missed its first-quarter financial expectations Tuesday because of
“aggressive pricing and soft consumer demand.” The Lexington, Ky.-based company
also issued weak second-quarter targets for the same reasons.
On Tuesday, Lexmark shares fell 14% to $67.70 — an 18-month low. H-P
shares dropped 3% to $20.47, about where shares traded last month before the
company named Mark Hurd chief executive officer, as investors reacted negatively
to the possible implications of a printing price war.
But falling printer prices shouldn’t be a surprise to investors. In
February, H-P predicted it would get more aggressive on pricing for its
printers, as H-P Executive Vice President Vyomesh Joshi said in a conference
call, in order to “drive faster hardware growth and recapture some share
losses.”
Lexmark’s financial report was the first indication of how aggressive H-P
might have become during the quarter. Lexmark reported earnings excluding
charges of 99 cents a share on sales of $1.36 billion, while analysts had
expected earnings excluding charges of $1.03 a share on sales of $1.38 billion.
H-P is the world’s largest maker of printers, followed by Lexmark,
Seiko Epson and Canon. H-P, however, is vulnerable because of its
recent struggles and its reliance on printers to generate the majority of its
profits. Analysts expect earnings of 36 cents a share on sales of $21.39 billion
when H-P reports second-quarter financial results on May 17.
Compressed margins have become a growing concern for H-P investors. In
the first quarter, H-P said margins slipped to 22.9% from 23.3% in the fourth
quarter and 24.7% in the first quarter last year.
To combat gravity, H-P said it would cut costs, fight for market share
and streamline its supply chain. The company predicted that investors would not
see the types of margin declines, going forward, that it had in the first
quarter.
But that remains to be seen.
Analyst Bill Fearnley Jr., of FTN Midwest Securities, had expected the
printer market in the past few months to become more competitive, resulting in
reduced margins for manufacturers. He doesn’t foresee an immediate end to the
problem and predicts that the price war will continue at least through the
calendar third quarter.
“It wouldn’t surprise me for this pressure to last through the
back-to-school shopping season,” he says. “That’s the next major showdown for
market share gains.” Fearnley, whose firm has no investment banking relationship
with Lexmark or H-P, doesn’t own shares of either company.
Because printers represent a source of substantial strength for H-P, the
dangers of entering a long-term price war here are magnified.
“If the rest of the company were more healthy, then they could more
easily afford to put the revenue and profits from printing and imaging at risk,”
says Charles King, principal with Pund-IT Research.
According to King, the printer industry is increasingly driven by the
whims of supply and demand — and that spells trouble. “The commoditization
pressures that have affected the PC industry and hurt H-P,” King says, “are
increasingly becoming a problem in the printing and imaging industry.”
That means declining margins for printers could be more than just a two-
or three-quarter issue. It could be an irreversible trend and one that will
ultimately gobble up the profits H-P’s printing unit has used in the past to
prop up its other, already-commoditized business units.

[Author]

May 5, 2005 at 10:04 AM