Shares of HP (NYSE:HPQ) dropped 6% on Nov. 22 after the PC and printer maker reported its fourth quarter earnings. That decline was surprising, since HP's numbers looked solid -- its revenue rose 11% annually to $13.9 billion, beating expectations by $550 million. Its non-GAAP net income rose 22% to $700 million, or $0.44 per share, matching analyst expectations.
So why were investors so eager to sell HP? Let's take a closer look at HP's fourth quarter numbers to find out.
PC sales remain strong
HP's Personal Systems (PC) revenue rose 13% annually to $9.1 billion, and total shipments grew 6%. Notebook shipments rose 8% annually, with 16% sales growth, and desktop shipments improved 2% with 10% sales growth. Its commercial and consumer revenues respectively rose 11% and 18%.
HP's growth is an anomaly in the PC industry, where shipments have declined for 12 straight quarters, according to Gartner. The firm reports that HP was the only PC vendor to grow its market share annually during the third quarter, as all of its main rivals -- Lenovo (NASDAQOTH:LNVGY), Dell, Asus, Apple, and Acer -- posted annual declines.
That recovery -- which helped HP reclaim its crown as the world's top PC maker from Lenovo earlier this year -- was largely attributed to better premium laptop designs, new high-end gaming laptops, more secure PCs for enterprise customers, and strength in the North American market.
However, the unit's operating margin still fell 50 basis points annually to 3.8% due to rising component prices. HP is raising prices worldwide and leveraging the scale of its supply chain to offset those higher expenses, but those prices (especially memory chips) should remain elevated for at least another year.
Printer sales are also rising
HP's printing revenues rose 7% annually to $4.9 billion as total shipments grew 3%. Shipments of consumer printers rose 3%, but shipments of commercial printers stayed flat. Supplies revenue rose 10% annually.
Looking ahead, HP expects its acquisition of Samsung's (NASDAQOTH:SSNLF) printing business to improve the business' scale while increasing its market presence in A3 multifunction printers, which can simultaneously replace printers, scanners, copiers, and fax machines. However, that acquisition also includes Samsung's weaker A4 printer business, which has been struggling in the low-end market.
HP is also launching industrial 3D printers for enterprise customers and plans to introduce metal 3D printers in the near future. Those new products could significantly boost its commercial printing revenues.
The printing unit's operating margin rose 260 basis points to 16.6%. A large part of that gain was attributed to a one-time change to its supply sales model in the prior year quarter, which resulted in unusually lower margins.
But even excluding that adjustment, HP CFO Catherine Lesjak stated that the unit "saw good operating profit dollar expansion year-over-year." However, the unit's operating margin still dipped 40 basis points sequentially due to "materially higher-than-normal unit shipments" in the lower-margin consumer market.
The outlook and valuations look solid
HP expects its first-quarter earnings to rise 5% to 13%, and for its fiscal 2018 earnings to grow 6% to 13%. Both figures matched analyst expectations. HP's stock has already rallied more than 40% this year, but the stock still looks fairly cheap at 12 times next year's earnings.
HP expects to generate "at least" $3 billion in free cash flow in fiscal 2018, compared to about $3.9 billion in fiscal 2017. HP returned 59% of that total to shareholders through dividends and buybacks throughout the year.
HP recently raised its dividend for the second time after its split with Hewlett-Packard Enterprise (NYSE:HPE) in late 2015. That gives it a forward yield of 2.6%, compared to HPE's yield of 2.2% and the S&P 500's yield of 1.9%.
The bottom line
HP's post-earnings sell-off was seemingly triggered by the company merely matching bottom line estimates instead of beating them, profit taking, and HPE's bleak guidance and the resignation of its CEO Meg Whitman -- which caused some confusion but had nothing to do with the "new" HP.
Therefore, I believe that HP's pullback represents a smart long-term buying opportunity since its core businesses are healthy, the stock is cheap, and it pays a decent dividend.