Hewlett-Packard Is Primed for Big Printing Profit

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Hewlett-Packard's printing business has been its most reliable cash cow over the years, and never moreso than in 2013. Despite a second straight annual revenue decline, printing pre-tax profit grew 8.5% last year for HP, reaching nearly $4 billion.

HP's highly profitable printing business is on the upswing again

Right now, all signs point to yet another strong performance from the printing business in 2014. HP ended 2013 on a high note, with printer unit sales returning to growth in the second half of the year. This should lead to rebounding sales of ink and toner in 2014, driving further margin growth.

The printing segment bounces back
In 2012, the printing segment pre-tax margin fell from 15% to 14.6%, primarily due to the strength of the yen. HP sources toner and many of its laser printer components from Japan, so a strong yen increases its costs.

In contrast, the yen began to slide in late 2012 due to a change in Japanese monetary policy. As the resulting cost savings trickled through to HP's bottom line, the printing segment margin began to rise. The dollar has continued to gain value against the yen, and the exchange rate recently reached a new multiyear high.

US Dollar to Japanese Yen Exchange Rate Chart

US Dollar to Japanese Yen Exchange Rate, data by YCharts

The yen's weakness helped HP improve its printing segment margin from 14.6% to 16.3% last year, but there is still plenty of incremental upside. Indeed, the printing segment margin rose throughout the year as HP realized additional cost savings from the yen's decline, and reached 17.7% last quarter.

Profit drivers for 2014
The weak yen should continue to be a margin growth driver for HP's printing unit in 2014. However, the company is also seeing good results from earnings growth initiatives within the printing unit.

First, the company has been using the yen's weakness as an opportunity to offer good deals on printers, particularly for businesses. As the installed base of HP printers grows, demand for HP supplies like ink and toner will rise. These supplies sales have very high margins, and will provide a steady stream of long-term profit.

Second, HP has been cutting back on sales of low-end consumer printers, as it found that many of these sales were unprofitable because the buyers were using generic ink rather than HP ink. Instead, the company has been focusing on selling printers that have a high "lifetime value" for HP. This has included experimenting with new business models, such as marketing inkjet printers to small businesses and reducing ink prices in developing countries.

Foolish bottom line
At HP's analyst meeting back in October, the company projected that the printing segment would generate earnings growth of roughly $0.07-$0.11/share in 2014. However, the dollar has continued to appreciate against the yen in the last 3 months. If the yen-dollar exchange rate remains near its current level through 2014, HP will realize additional cost savings compared to its plan.

As a result, HP's printing segment may be able to contribute even more earnings growth this year. Considering that HP is currently valued as if its earnings will continue to decline forever, any kind of growth is great news for shareholders. HP's printing unit is a multi-billion dollar cash cow that is not going away anytime soon, and will continue to generate great value for patient investors.

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The article Hewlett-Packard Is Primed for Big Printing Profit originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg owns shares of Hewlett-Packard Company. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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