In no uncertain terms, HP Inc. (NYSE:HPQ) management had decided the personal computer industry was in decline. Former CEO Meg Whitman decided to spin off the higher-growth enterprise business from the company's core PC and printer manufacturing business to unlock value.

Meanwhile, the remaining company (HP Inc.) would focus on traditional management tactics of dealing with an industry in decline, which mostly consists of returning cash to shareholders, controlling costs, and attempting to win market share. The company's stated goal was that 50% to 70% of free cash flow would be returned to shareholders via buybacks and dividends.

That's not a recipe for rocketing growth, but what if the "death of the PC" obituary was written too soon? Does that mean HP Inc. is undervalued?

A person sitting in front of six computer monitors with their hands raised in celebration.

Image source: Getty Images.

Palo Alto, we have PC growth

According to global research and advisory firm Gartner, the PC market is growing again. The company's preliminary PC market estimates show that the overall industry shipped nearly 62.1 million units in the second quarter, 1.4% more than in the prior year. This represents the first year-over-year shipment growth in the past six years.

Company Q2 2018 Shipments Q2 2018 Market Share Q2 2017 Shipments Q2 2017 Market Share Year-Over-Year Change
Lenovo 13.601 million 21.9% 12.310 million 20.1% 10.5%
HP Inc. 13.589 million 21.9% 12.809 million 20.9% 6.1%
Dell 10.458 million 16.8% 9.553 million 15.6% 9.5%
Apple 4.395 million 7.1% 4.266 million 7% 3%
Acer Group 3.969 million 6.4% 3.851 million 6.3% 3.1%
Others 16.083 million 25.9% 18.466 million 30.1% (12.9%)
Total 62.095 million 100% 61.254 million 100% 1.4%

Data source: Gartner.

Gartner's estimates were even better for HP Inc. The company expanded its market share from 20.9% to 21.9% due to 6.1% growth in number of devices shipped, which was more than three times the growth rate of the greater industry. Although the PC industry has recently endured a period of contraction, HP Inc. and other top manufacturers have experienced success in the higher-end ultramobile market; this is the third consecutive quarter of PC growth for HP Inc.

At first glance, there was one negative for HP Inc.: The company lost the title of world's largest PC maker to Chinese manufacturer Lenovo, which led all manufacturers with 10.5% growth. However, this is somewhat misleading as Lenovo's second-quarter results and corresponding growth rate were boosted by its recent Fujitsu joint venture.

The market is unconvinced, and maybe this is an opportunity

Although shares of HP Inc. have quietly advanced 31% in the last year, even in the face of sluggish PC sales, HP Inc. remains cheaply valued on traditional metrics. Currently, the company trades at 11 times forward earnings versus 17 times for the greater S&P 500, and price-to-cash-flow figures are nine times to 13.5 times, respectively. In the event the PC market's situation is not as dire as anticipated, multiple expansion could send shares higher.

Yield-hungry investors should look at the company. Although the dividend yield of 2.4% is only 60 basis points higher than the greater S&P 500's average, the company's earlier promise of cash return of 50% to 70% is worth keeping in mind. In the two fiscal years post-split, HP Inc. has repurchased more than 4% of its market cap every year and increased its dividend 12%.

The upshot is that the bear thesis on HP Inc. appears to be moderating, which could be a boost to this cheaply valued company. Value and income investors should put the stock on their watchlists and follow PC shipments closely.