Shares of HP (NYSE:HPQ) dipped on Aug. 23, after the PC and printer maker posted its third-quarter earnings. The market reaction was surprising, since HP beat analyst expectations on the top and bottom lines.

HP's revenue rose 12% annually (9% on a constant currency basis) to $14.59 billion, clearing estimates by $320 million and marking its fourth straight quarter of double-digit sales growth. Its non-GAAP net earnings increased 21% to $0.52 per share, topping expectations by a penny. On a GAAP basis, its earnings grew 32% to $0.54 per share.

An HP laptop.

Image source: HP.

HP expects its fourth-quarter earnings to surge 18%-25% annually and for its full-year earnings to go up 21%-23%. Both forecasts matched analyst estimates. It expects its full-year free cash flow (FCF) to rise 12% to $3.7 billion, in spite of its acquisitions of Samsung's printing unit and office equipment dealer Apogee.

HP's headline numbers look solid, and its stock looks cheap at about 12 times this year's earnings. So why weren't investors more excited about the results?

Understanding HP's business model

HP generates its revenue from two main businesses: personal systems (PCs) and printing. Personal systems revenue accounted for 64% of its top line during the quarter, while printing revenue comprised the remaining 36%.

However, HP's printing business is significantly more profitable than its personal systems business. The personal systems unit generated just 31% of its operating profit last quarter, while the printing division generated nearly 71%. (That total exceeds 100% due to a $22 million loss from its smaller corporate investments unit.)

Grading HP's core growth engines

Here's how HP's core businesses fared during the third quarter.

Metric Personal Systems Printing
Revenue $9.4 billion $5.2 billion
YOY growth 12% 11%
Operating profit $365 million $832 million
YOY growth 17% 2%

Data source: HP Q3 earnings report. YOY = year over year.

In Personal systems, HP's total shipments grew 6%, with 6% units growth in notebooks and 7% growth in desktops. Its notebooks revenue rose 13% as its desktops revenue climbed 12%. By segment, its commercial and consumer revenues went up 13% and 10%, respectively.

Personal systems' non-GAAP operating margin of 3.9%, which grew from 3.7% in the prior-year quarter, indicates that component costs and competition are no longer major threats to the unit's bottom line. It also indicates that HP's emphasis on higher-end ultrabooks, convertibles, and gaming PCs is paying off.

In the printing segment, total hardware unit shipments jumped 12%, with 91% growth in commercial units (inflated by the Samsung acquisition) and 2% growth in consumer units. The division's higher-margin supplies revenue also increased 8%.

The printing unit's operating margin of 16% represents a decline from 17.3% a year earlier, but that mainly reflects HP's integration of Samsung's printing business, which significantly expands its presence in the A3 multifunction printer market. That drop caused HP's total non-GAAP operating margin to slip from 7.7% to 7.3%.

A 3D printer printing a blue vase.

Image source: Getty Images.

Looking ahead, HP's acquisition of Apogee will significantly boost the unit's presence in the Managed Print Services (MPS), while new mobile and industrial 3D printers will continue to diversify its revenue beyond traditional printers.

HP also posted solid sales growth across the world, with 7% growth in the Americas, 17% growth in the EMEA (Europe, Middle, East, and Africa) region, and 15% growth in the Asia-Pacific region.

HP reclaimed its crown as the world's largest PC maker from Lenovo (NASDAQOTH:LNVGY) last year, thanks to its strength in North America. IDC's latest numbers indicate that HP controlled 23.9% of the global PC market during the second quarter, compared to Lenovo's 22.1% share.

Evaluating its shareholder returns

HP generated $1.4 billion in FCF during the third quarter, and returned $919 million of that total (66%) to shareholders via buybacks and dividends. That's in line with the company's promise to return 50% to 75% of its FCF to shareholders over the long term.

The company also recently approved a new $4 billion buyback plan, which is equivalent to nearly 10% of its current market cap. With the stock still trading at a steep discount to the S&P 500's forward P/E of 18, it makes sense for HP to continue repurchasing shares at these levels.

HP currently pays a forward dividend yield of 2.3%, which is higher than the S&P 500's average yield of 1.8%. It's also raised that dividend twice after splitting with Hewlett-Packard Enterprise in late 2015.

Don't underestimate HP

HP's stock rallied nearly 30% over the past 12 months, but investors still seem to underestimate this "mature" tech company's long-term growth potential. HP's core businesses are healthy and it's constantly rewarding shareholders, making it a solid long-term investment at these low valuations.