Company Overview 1 TICKER - NYSE: HPQ. Main Features: Billion Dollars in Revenue. Market Leader in Printing Industry

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Kristina Snow
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2 1 Market Statistics 52 Week Range $ $17.81 Avg Daily Vol (3 Mo) 12,524,223 Market Value (M) 30,050 Ent Value (M) 30,598 Shares Out (M) 1,705 Dividend Yield 3.0% Indicated Annual Dividend 0.53 Float 99.9% TICKER - NYSE: HPQ Main Features: Billion Dollars in Revenue Market Leader in Printing Industry Second Largest Market Share in PC Industry S&P 500 & HP Inc. Prices Institutional 81.3% Top 10 Inst Holders 36.8% HP Inc. S&P 500

3 Recommendation 2 20% 10% Growth Rates of Net Income and FCFF Recommendation Key Drivers: Improved Operational Efficiency 0% -10% -20% HOLD Target Price: $17.78 Lower Overhead Costs due to Restructuring Poised to take Market Leader in the 3D Printing Industry -30% Net Income Free Cash Flow to Firm

Business Description 3 1939 Establishment of Hewlett-Packard 1957 IPO on NYSE

Alto, CA 2015 Restructuring to create HP Inc.

4 Business Description Establishment of Hewlett-Packard 1957 IPO on NYSE 1947 Incorporation of Hewlett-Packard Printing 38% Global Headquarters in Palo Alto, CA 2015 Restructuring to create HP Inc. and HP Enterprise Personal Systems 62% 62% of Revenue comes from the PC Sector 38% of Revenue comes from the Print Sector

Sprout all-in-one 25 20 Global 3D Printing Forecast

5 Future Prospects 4 Collaboration in Virtual Reality with Oculus Rift and HTC Potential Boom of 3D Printing Sprout all-in-one Global 3D Printing Forecast (in billions)

7 Industry 5 Epson 21% Printer Market Share Canon 24% Roland 4% Mimaki 3% HP Inc 48% Personal Systems Five Year Contraction in PC Market PC Shipments Down 5.7 % in 2016 Market Wide Saturated Market with Strong Price Discrimination Print Print Revenue Decreased by 7% YOY in 2016 Trend Towards Digital Documents 3D Printing a Growth Prospect Apple 9% Asus 9% Dell 19% PC Market Share Acer Group 9% Lenov o 28% HP Inc. 26%

8 ing 6 In Billions Personal Systems Net Revenue Personal Systems Converging upon Lenovo for as Market Leader Marketing to Attractive Customer Segments Cross-selling a Broad Portfolio of Offerings Immersive Computing Print Government and Educational Contracts Shifting Behavior from Transactional to Contractual Graphics Solutions Services which Focus on Digital Print In Billions Printing Net Revenue

9 5 Forces 7 Existing Rivalries Power of Buyers Power of Suppliers Future Outlook as a Whole: Power of Buyers: No Single Buyer Responsible for more then 10% of Sales Power of Suppliers: Canon Produces Components of HP Inc. Printers Threat of Substitutes: Low Product Differentiation and Price Competition Threat of New Entrants Threat of Substitutes Threat of New Entrants: HP Inc. has Formidable Market Power Existing Rivalry: Within PC Segment Lenovo has Similar Sales Numbers

10 Corporate Governance 8 Shareholder Threat Rating Shareholder Threat Rating Executive Compensation tied to Performance Share Price and Executive Compensation Takeover Defense Rights and Obligations of Executive Management Board of Directors Successfully Executed Largest Corporate Separation in History Management has been able to Improve Cost Structures Leadership has Articulated and Advanced HP Inc. s Strategy to Exploit New Income Streams Share Price Exec Comp

12 Strong Liquidity and Efficiency 9 Ability to Offer Products to Consumers at Favorable Credit Highest Days Payable Outstanding in the Industry Operating Cycle (Days) E 2018E 2019E 2020E 2021E Days Inventory on Hand Days Sale Outstanding = Operating Cycle Days of Payables Outstanding Net Operating Cycle Days Payable Outstanding HP Inc Canon Inc Xerox Corp 97.7 Apple Inc 69.0 Acer

13 Capacity for Further Expansion 10 Cash From Operations Sufficient to Cover Dividend, Interest and Capital Expenditure Debt/EBIT Ratio 6.68 Potential to Issue More Debt to Fund Opportunities Cash From Operations Utilization E 2018E 2019E 2020E 2021E Surplus Dividend Interest Payment Capital Expenditure 2 HP Inc 2.7 Canon Inc Xerox Corp 4.72 Lenovo Group 1.49 Apple Inc 3.51 Industry Average

14 Growing Profit Margins and Stable Dividend 11 Low Dividend Payout Ratio, Indicating Growthorientation and Potential for Higher Dividends Net Profit Margin Higher than Peers and Expected to Increase in the Future 8.0% 6.0% 5.7% Net Profit Margin 6.1% 6.1% 6.5% 7.2% 100% 80% 60% 40% 20% 0% Dividend Payout Ratio and Net Profit Margin 34.70% 93.80% 44.40% 62.10% HP Inc Canon Inc Xerox Corp Lenovo Group 6% 5% 4% 3% 2% 1% 0% 4.0% 2017E 2018E 2019E 2020E 2021E Dividend Payout Ratio(LHS)

16 Free Cash Flow to the Firm 12 HPQ Earning Per Share and Dividend Yield HP s Competitors are Unique Little to no Pure Play Dividends Independent of Earnings FCFF Matches well to Historic Firm Percentage Change of Price and FCFF HPQ EPS HPQ Dividend Yield HPQ - Price HPQ - FCFF

17 Model Assumptions 13 5 Year FCFF Model with a Terminal Value after 2021 WACC of 9.125% Return to Positive Growth Rates in 2020 for Printing Segment No Substantial Increases in Tax Rate Cost Improvement of 1.75% No Major Deviations in Shares Outstanding or Capital Structure Projected 5 Year DCF Year FCFF Discounted FCFF Growth 1 $2,772 $2, % 2 $2,696 $2, % 3 $2,828 $2, % 4 $2,891 $2, % 5 $3,141 $2, % Terminal $41,606 $26, % Value of Firm $37,879 Value of Debt $6,758 Value of Equity $31,121 Shares 1750 Per share $17.78

18 Weighted Average Cost of Capital 14 Segment HPE/HPQ Earnings to GDP 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% % % % 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% Indicated Annual Dividend is 53 Cents Dividend Yield Approximately 3.0% at Target Price Current Weighted YTM of Long Term Debt is 2.8% Highest Observed YTM is 3.1%, Maturing Year U.S. Treasuries Yield 2.5% S&P 500 Average Return of 8.16% Beta of 1.43 World GDP HPE Segments HPQ Segments

19 Growth Growth Forecasts by Region Africa (Region) Asia and Pacific Europe Western Hemisphere (Region) Short Term Growth Rates Assumed to Remain Negative for Print Expected Return to Growth in 2020 for Print Terminal Growth Rate at 1.5% Growth Forecasts by Analytical Group Advanced economies Emerging market and developing economies

20 Implied Intrinsic Value 16 Base Case $17.78 Bear Case $16.62 Bull Case $18.95 Sensitive to WACC, +2% Share Price $12.08 Continued Decline, and Zero Terminal Growth $13.25 No Cost Efficiency, $13.00

22 Matrix 17 Continued slowdown in printing and personal computing sectors (BR1) Economic weakness and uncertainty in global markets (BR2) Failure to manage, complete, integrate acquisitions/significant transactions (BR3) Failure to properly manage third party suppliers (BR4) Fluctuations in foreign currency exchange rates (MR1) Interest Rate (MR2) Likelihood LOW MEDIUM HIGH MR1 BR2 BR1 MR2 BR3 BR4 LOW MEDIUM HIGH Impact

23 Sensitivity to Supply Chain Shocks 18 16% 14% 12% 10% 8% 6% 4% 2% 0% Percentage of COGS by Supplier Canon Inc. Advanced Micro Devices, Inc. Intel Corporation Approximately 30% of COGS attributable to 3 suppliers: Canon Intel AMD % Increase in supplier cost Target Price: Scenario Base 5% Decrease in supplier cost

24 Sensitivity to Foreign Currency Exchange Rate 19 Percent of Revenue % 37.3% Assumptions Currency Fluctuations are not Passed on to Consumers 80% of COGS from Outside US No Currency Hedging Instruments Used 1.00 US Outside US 2016 EUR:USD Target Price: Scenario % increase in USD Base 5% decrease in USD

25 20 Improved Efficiency Post Split Strong Market HOLD Leveling Industry Outlook Current Price Target Price HPR $17.62 $ % position

26 26

27 Sources and Citations I Slide 1: Factset, HPQ 10K Slide 3: HPQ 10K Slide 4: IDC Slide 5: Factset Slide 6: Statista Slide 8: Morningstar Slide 9: Factset Slide 10: Factset Slide 11: Factset Slide 12: Factset Slide 14: HPQ 10K , IMF World Economic Outlook 2016 Slide 15: IMF World Economics Outlook 2016 Slide 18: Factset Slide 19: HPQ 10K P Inc. 10-K; Factset

28 Appendix - Ratios II Profitability Per Share HP Inc. Lenovo Apple Canon Epson HP Inc. Lenovo Apple Canon Epson HP Inc. Lenovo Apple Canon Epson Price/Sales Gross Margin Sales per Share , ,898.1 Price/Earnings Price/Cash Flow Price/Free Cash Flow SG&A to Sales EBIT (Operating Income) per Share Operating Margin EPS (recurring) Pretax Margin EPS (diluted) Dividend Yield (%) Net Margin Dividends per Share Enterprise Value/EBIT Enterprise Value/EBITDA Free Cash Flow Margin Dividend Payout Ratio (%) Return on Assets Book Value per Share , ,386.7 Enterprise Value/Sales Return on Equity Tangible Book Value per Share , ,325.9 Return on Common Equity Cash Flow per Share Return on Total Capital Free Cash Flow per Share Return on Invested Capital Diluted Shares Outstanding 1, Cash Flow Return on Invested Capital Basic Shares Outstanding 1,

29 CFO/Total Debt Appendix - Ratios III Liquidity HP Inc. Lenovo Apple Canon Epson HP Inc. Lenovo Apple Canon Epson Coverage Current Ratio Net Debt/EBITDA Quick Ratio Net Debt/(EBITDA-Capex) Cash Ratio Total Debt/EBITDA Cash & ST Inv/Current Assets (%) EBIT/Interest Expense (Int. Coverage) CFO/Current Liabilities (%) EBITDA/Interest Expense Fixed-charge Coverage Ratio CFO/Interest Expense Cash Dividend Coverage Ratio LT Debt/EBITDA Net Debt/FFO LT Debt/FFO

30 Appendix (Base) IV Base Case Sales Sales in Personal Systems (Assumed to be 60% of total) Sales in Printing (Assumed to be 40% of total) Cost of Goods Sold (COGS) excl. D&A Depreciation and Amortization Cost of Goods Sold (COGS) incl. D&A Gross Income SG&A Expense EBIT (Operating Income) Interest Expense Nonoperating Income - Net Pretax Income Income Taxes Net Income Discontinued Operations Net Income available to Common EPS (diluted) Dividends per Share Net Income Deferred Taxes & Tax Credit Other Funds Depreciation and Amortization Post-tax interest (FCInv) (WCInv) FCFF

31 Appendix (Bull) V Bull Case Sales Sales in Personal Systems (Assumed to be 60% of total) Sales in Printing (Assumed to be 40% of total) Cost of Goods Sold (COGS) excl. D&A Depreciation and Amortization Cost of Goods Sold (COGS) incl. D&A Gross Income SG&A Expense EBIT (Operating Income) Interest Expense Nonoperating Income - Net Pretax Income Income Taxes Net Income Discontinued Operations Net Income available to Common EPS (diluted) Dividends per Share Net Income Deferred Taxes & Tax Credit Other Funds Depreciation and Amortization Post-tax interest (FCInv) (WCInv) FCFF

32 Appendix (Bear) VI Bear Case Sales Sales in Personal Systems (Assumed to be 60% of total) Sales in Printing (Assumed to be 40% of total) Cost of Goods Sold (COGS) excl. D&A Depreciation and Amortization Cost of Goods Sold (COGS) incl. D&A Gross Income SG&A Expense EBIT (Operating Income) Interest Expense Nonoperating Income - Net Pretax Income Income Taxes Net Income Discontinued Operations Net Income available to Common EPS (diluted) Dividends per Share Net Income Deferred Taxes & Tax Credit Other Funds Depreciation and Amortization Post-tax interest (FCInv) (WCInv) FCFF

33 Appendix Projected Statements VI Assets Cash & Cash Equivalents Accounts Receivables Inventories Other Current Assets Current assets of discontinued operations Total Current Assets Gross Property, Plant & Equipment (Accumulated Depreciation) Net Property, Plant and Equipment Goodwill Other non-current assets Non-current assets of discontinued operations Total Assets Liabilities & Shareholders' Equity Current Liabilities: Notes Payable and short-term borrowings Accounts Payable , Employee Compensation and benefits Taxes on Earnings Deferred Revenue Other Accrued Liabilities , Current Liabilities of discontinued operations Total Current Liabilities , Long-Term Debt , Other non-current liabilities , Non-current Liabilities of discontinued operations Non-controlling interestof discontinued operations Total Equity , Profitability Operating Profit Margin 7.22% 7.08% 7.40% 7.40% 7.63% 8.58% Net Profit Margin 5.18% 5.63% 6.02% 6.01% 6.36% 7.13% Return on Assets 3.92% 9.86% 10.42% 10.31% 10.76% 11.82% Return on Equity 22.33% % % % % % Return on Total Capital 12.61% 81.41% 70.00% 60.64% 58.90% 60.39% Gross Profit Margin 19% 19% 19% 19% 19% 20% Liquidity Current Ratio Cash Ratio Quick Ratio Activity Accounts Receivable Turnover Total Asset Turnover Inventory Turnover Fixed Asset Turnover Accounts Payable Turnover Ratio Leverage Long-term Debt to Assets Equity Multiplier Interest Coverage Long-term Debt/EBITDA Per Share Dividend Per Share EPS

34 Long Term Debt = Return on Equity Other non-current liabilties Appendix Assumptions, VII Assumptions regarding growth rates Operating Cycle (Days) Goodwill Days Inventory on Hand Property, Plant and Equipment Days Sale Outstanding Cash and Cash Equivalents = Operating Cycle Accounts Receivables Days of Payables Outstanding Inventories Other Current Assets =Net Operating Cycle/Cash Conversion Cycle in Days Other Non-Current Assets DuPont Notes Payable Asset Turnover Accounts Payable x Pretax Profit Margin Employee Compensation Taken from 10K Estimates = Pretax Return on Assets Taxes x Tax Rate Complement (1 - Tax) Deferred Revenue = Return on Assets Other Accrued Liabilities x Equity Multiplier

35 Appendix Assumptions, VIII WACC Year Operating Profit Margin Net Profit Margin Weight of Equity Weight of Debt Cost of Debt Beta Rm Rf Cost of Equity Tax Rate 0.22 WACC

1) Using the information provided for Gasparro Corp., complete the questions regarding fully diluted shares outstanding

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