HP Inc. (NYSE:HPQ) is the posterchild of making lemonade out of lemons. Under prior CEO Meg Whitman the company spun off its higher-margin, higher-growth enterprise business to a new company -- Hewlett-Packard Enterprise (HPE) -- while leaving behind the legacy PC and printing business. If there were any questions as to what company management favored, it was answered by Whitman who assumed the CEO role at HPE.
At the time, it was argued that the split would allow HP to focus and update its product portfolio to win PC market share. Also, HP would spend most of its cash flow paying dividends and buying back shares, a classic corporate strategy for a business in a mature and declining market.
Instead, the company has experienced a mini-renaissance: Can HP Inc. continue to defy expectations?
Winning market share in PCs with a growth driver in printing
While shares of HP have underperformed HPE post-split, both are still vastly outperforming the greater market -- HP Inc. has more than doubled the S&P 500's 32% return. HP Inc. continues to execute in a tough environment: IT-focused analysis firm Gartner found shipments in the PC market decreased 2.8% in 2017, the sixth consecutive year of declines. However, HP was able to post 4.6% year-over-year growth, growing its market-share lead from 19.5% to 21%.
Although HP still derives most of its revenue -- approximately two-thirds -- from its personal systems (computers) division, the best case for the company as a long-term investment lies within the printing division. HP is positioned to be a large player in the 3D-printing business, with more financial wherewithal than pure-play printing companies like 3D Systems and Stratasys. HP may be the lowest-risk way to participate in the additive manufacturing industry due to its developed personal systems and non-3D printing operations.
Still priced at a discount
Even with its strong performance post-breakup, HP is still cheap on a relative basis. Currently, shares trade at 11 times estimated forward earnings versus 17 times from the greater S&P 500. The consensus estimate of 11 times future earnings may be low considering management is forecasting 2018 full-year GAAP earnings of $2.58 at the midpoint, which puts the figure closer to nine times earnings.
The company has been returning approximately 70% of its cash through share buybacks and dividends, and the former will continue to make the company cheaper by decreasing shares outstanding and increasing EPS.
On the surface, a cheap valuation like this makes sense considering HP's primary business is in a state of perpetual decline and the company's top line, while posting a year-over-year increase, is still below 2014's take. However, the company should continue to grow in personal systems by consolidating market share and by selling higher-price premium notebooks and desktops. Additionally, the company has a potential growth catalyst in 3D printing that could pay off handsomely. Value investors should give the company another look.