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Why HP Inc. Rose 11% in January

By Jamal Carnette, CFA - Feb 10, 2018 at 5:43PM

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Contrary to popular opinion, HP Inc. may have been the better company from the Hewlett-Packard split.

What happened

After being left for dead, HP Inc. (HPQ -2.78%) has recently shown signs of life. In January, shares of the computer and printing manufacturer rose 11%, according to data from S&P Global Market Intelligence, building upon 2017's strong performance.

So what

In 2015, the company that was then Hewlett-Packard performed a stock split separating its enterprise-focused operations, industrial servers, software, and networking equipment from the consumer-focused laptop-PC and printer business.

The former, Hewlett-Packard Enterprise (HPE -2.26%), was widely considered the healthier, growth-oriented company (unsurprisingly, Hewlett-Packard CEO Meg Whitman became the CEO of HPE) while HP Inc., stripped of its name, was considered a secular declining legacy business under attack from mobile smartphones.

Person typing on a computer.

Image source: Getty Images

It was argued the breakup would allow HP Inc. to innovate and win market share, but the announcement also noted it would return 50% to 75% of free cash flow to shareholders, a classic corporate strategy in a declining/no-growth market. Last year was the exact opposite: HP Inc. stock rose 42% on the back of 8% year-on-year revenue growth, while HPE's stock produced a modest 7% return. Meg Whitman, the brain trust behind the corporate split, stepped down from HPE after a disappointing fourth quarter.

HPQ Chart

HPQ data by YCharts

Now what

In January, investors received more positive news about HP. As my colleague Leo Sun points out, last year HP led the world in PC shipments, according to data from Gartner Inc. Additionally, HP posted the strongest PC shipment growth of major companies, increasing total shipments by 4.6%, making it one of only three major PC manufacturers to post year-on-year growth -- the other two being Apple and Dell.

In fiscal 2017, HP grew revenue from personal systems (computers) 11% over the prior year. While the company's printing business didn't grow at the same pace as personal systems, 3D printing could be its next catalyst for growth.

Despite a strong 2017, shares of HP Inc. are still cheaply valued. Currently, the company trades at 11 times earnings, versus the greater S&P 500's multiple of 16 times. In addition, the company has a dividend yield of 2.8%, 90 basis points greater than the S&P 500. If you're looking for a cheaply valued, high-yielding turnaround stock, you can do worse than HP Inc.

 

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Stocks Mentioned

HP Inc. Stock Quote
HP Inc.
HPQ
$31.87 (-2.78%) $0.91
Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.93 (1.62%) $2.21
Gartner, Inc. Stock Quote
Gartner, Inc.
IT
$244.28 (1.01%) $2.45
Hewlett Packard Enterprise Company Stock Quote
Hewlett Packard Enterprise Company
HPE
$12.96 (-2.26%) $0.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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