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HP Inc (HPQ) on Fire: What is Driving the Stock Higher?


Shares of world’s second-largest PC manufacturer, HP Inc. HPQ have been rallying since its split from the parent company, driven particularly by its turnaround efforts.

Notably, HP is one of the two publicly traded entities that were formed after the Nov 2015 split of Hewlett-Packard Company. The other company that was formed in the process was Hewlett Packard Enterprise Company HPE. HP focuses on PC and printing products and services.

Since its split, the stock has gained 22.5% and has clocked a year-to-date return of 26.6%. The company attained a new high of $15.00 yesterday before closing a tad lower at $14.99, representing an intraday gain of approximately 3.1%.

What’s Driving the Rally?

We believe that the parent company’s (Hewlett-Packard Company) decision to split the business has been a boon for HP. This is because a split allows a customized approach to two different businesses, which may not have been possible while they operated as a single entity.

Since its split, HP has been restructuring its business to reap long-term benefits. The company has divested its content management software tools and Customer Communications Management (CCM) assets to Open Text Corporation in a move which will facilitate in the business realignment and allow it to focus better on the PC and printing businesses. Apart from this, it will also facilitate cost reduction and enhanced productivity, thereby helping the company boost profitability.

Furthermore, post the split, HP has been focused on product innovation and differentiation to maintain its leading position in the space. Keeping with this, during third-quarter fiscal 2016, the company launched EliteBook Folio, the world's thinnest and lightest business class notebook.

Meanwhile, the company is also undertaking pricing actions, and marketing and sales activities in a bid to drive demand, in turn giving some price stability to the market. Moreover, HP is trying to shift its product mix to the high end and move away from the low-and negative-margin businesses.

The impact of these efforts was reflected clearly in the company’s last earnings release, wherein the Personal Systems segment witnessed stabilization to a certain extent and even recorded a slight year-over-year improvement after several quarters.

The company’s efforts to revamp the printing business have also been commendable. Note that HP has recently signed a deal to acquire Samsung Electronics’ printer business for a purchase price of $1.05 billion.

The acquisition is a strategic fit for HP as it will be able to expand the company’s printing business with the addition of 6,500-plus printing patents owned by Samsung. The move will offer support to the development and manufacturing of HP printers, going forward.

In addition, the company is now focusing on enhancing its 3D printing business capabilities in an effort to revive tumbling sales. Note that even though HP has been operating in this space for almost five years now, it still lags behind 3D Systems Corporation DDD and Stratasys Ltd. SSYS.

Thus, in order to fortify its presence in the market, HP recently unveiled its Jet Fusion 3D Printing Solution, with two models to choose from – 4200 and 3200. Unlike 3D Systems and Stratasys, which target all kinds of consumers, HP is emphasizing only on industrial markets because of their ability to afford a premium range of 3D printing solutions.

To satisfy customers in this space, HP inked collaborations with the likes of BMW, Nike and Autodesk in order to develop more advanced 3D printing technologies for diverse industrial uses.

Bottom Line

HP’s efforts to turn around the business have been commendable. The company has adopted a strategy of focusing on product innovations and differentiation as well as on enhancing the printing business’ capabilities, which will help stabilize the top line.

The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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