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Is HP Stock a Buy?

By Aditya Raghunath - Apr 18, 2020 at 7:15AM

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Do the hardware giant's low valuation and attractive yield make it a good bet for long-term investors?

U.S.-based consumer hardware giant HP (HPQ -2.78%) has enjoyed household name status for several years now. It has a huge presence in the personal computer and printing segments not just in North America, but all over the world.

At the time of this writing, HP stock is down 33% from its 52-week high. Is this a good time to load up on the stock given this massive decline, or will the technology manufacturer underperform the broader markets going forward?

HP remains a market leader in the PC segment

In the personal computer (PC) market, HP is one of the largest players in the world. According to a report by technology research firm Canalys, HP accounted for 21.8% of the global PC market just behind China's Lenovo, which ended the March quarter with a share of 23.9%. The other top players in this segment include Dell, Apple, and Acer, accounting for 19.6%, 6.0% and 5.8% of the PC market, respectively.

In its most recently reported quarter ended in January, HP's PC sales were up 2% year-over-year at $9.9 billion. This was the 15th consecutive quarter of revenue growth in the personal systems segment for the company. Comparatively, the overall PC market experienced revenue growth of 2.7% in 2019, its first full-year growth post-2011, according to market research firm IDC.

HP has managed to outperform the overall PC market for quite some time. However, while the recent uptick in PC sales has been encouraging for HP, the next few months might make investors nervous.

Stock analysis by a trader

Image source: Getty Images.

The Canalys report has estimated that global PC shipments declined 8% in the March quarter, while HP's shipment decline is projected at 13.8%. The PC industry experienced a significant boost in demand for Q1, but this was offset by supply-chain constraints of Intel processors, as well as factory closures in China.

As more people are working from home and colleges are conducting classes online due to the COVID-19 pandemic, the demand for PCs continued to rise from the retail and enterprise sectors in the March quarter. However, Canalys is not too optimistic about the near-term. The research firm fears that an upcoming recession will lower business spending, while the increase in unemployment rates will also impact consumer demand for the rest of 2020.

Will the printing segment continue to face falling sales?

HP's other major business is its printing segment. In the fiscal first quarter of 2020, this business reported sales of $4.72 billion, a drop of 6.6% year-over-year. It was the segment's fourth consecutive quarter of sales decline, which can be attributed to longer upgrade cycles. HP's printing segment is also grappling with lower profit margins and rising competition in its supplies vertical.

In Q1, HP's supplies revenue was down 7% year-over-year, while its total hardware units fell 10%. The hardware giant expects subscription sales in printing to offset cyclicality and result in a steady revenue stream.

The company launched "Instant Ink" back in 2013, which delivers ink to consumers at a monthly fee. Similarly, its managed print services is enterprise-facing; it sells printers to larger corporations and will continue to generate revenue by providing ancillary services with the sale of cartridges and related supplies.

Though HP's subscription business continues to grow, it is currently too small to offset the overall revenue decline in printing. This continued tepid performance has resulted in massive lay-offs in the company's printing business. In Q1, HP's personal systems business accounted for 68% of sales while printing generated 32%.

HP continues to trade at a cheap valuation

HP has a market cap of $22.76 billion and is trading at a market cap-to-sales ratio of 0.40 (based on 2019 annual sales). The company's management has forecast non-GAAP earnings per share of between $2.33 and $2.43 for fiscal 2020. This indicates year-over-year earnings growth of 6.2% for the company at its midpoint estimate. HP stock is trading at a forward price-to-earnings multiple of just 6.7.  It is likely these earnings forecasts might move lower given the current uncertain macro environment.

Another attractive metric for HP investors is the stock's dividend yield of 4.5%. HP has increased its dividend payments at an annual rate of 9.5% over the last three years. HP reported operating cash flow of $1.28 billion and paid dividends amounting to $256 million in Q1. This low payout ratio gives it enough room to increase dividends going forward.

The verdict

HP has managed to increase earnings despite slowing revenue growth. In the first quarter of 2020, revenue fell by 0.6% compared to earnings growth of 25%. In 2019, despite flat year-over-year sales, the company's earnings were up over 10%. But HP remains part of a business sector that has long passed the growth cycle.

While the organization's dividend yield and low valuation remain attractive, it still fails to inspire investor confidence. In the last five years, shares of HP have gained 7.8%, widely underperforming the S&P 500 index, which is up 36.7% during this period. There are several other technology stocks that are a better buy in the current environment, with brighter growth prospects and a higher potential to increase investor wealth in the long-term.

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