Is It Too Late to Buy HP Stock?

HP's (HPQ -0.73%) stock price surged 15% to a 52-week high on April 7 after Warren Buffett's Berkshire Hathaway (BRK.A -0.15%) (BRK.B 0.02%) disclosed a new $4.2 billion investment in the PC and printer maker. The purchase gives Berkshire an 11.4% stake in HP and makes it the company's largest shareholder.

That's great news for HP's investors, but is it too late for other investors to hop on the bandwagon after Berkshire's big buy? Let's review HP's business, how it aligns with Berkshire's investing strategies, and if this stock still has room to run after more than doubling over the past three years.

Image source: HP.

A streamlined and evergreen business

HP spun off its enterprise business as Hewlett-Packard Enterprise (HPE -0.58%) in 2015. After that separation, the "new" HP only sold PCs, printers, and printing supplies to the consumer and commercial markets.

HP initially struggled with sluggish demand for its PCs as consumers pivoted toward smartphones, tablets, and convertible devices. But under Dion Weisler, who served as HP's CEO from 2015 to 2019, the company revived the stagnant PC business with fresh designs for high-end notebooks, convertible devices, all-in-one computers, and gaming desktops.

The printing business also initially struggled with lengthy upgrade cycles, competition from generic ink and toner suppliers, and the rise of paperless workplaces. However, Weisler also stabilized the printing business by launching a cost-efficient subscription service for its ink cartridges, increasing its scale by acquiring Samsung's printing business and the office equipment dealer Apogee, and developing a new line of industrial 3D printers.

When Weisler handed the reins to HP's current CEO Enrique Lores, the company's core businesses were generating slow but stable growth again.

But in fiscal 2020, which ended in October of the calendar year, it suffered another slowdown as businesses shut down during the pandemic and suspended their upgrades of new devices. It partly cushioned that blow by selling more consumer-facing PCs and printers for people who were working remotely and creating DIY projects at home, but its revenue still fell 4% for the full year as its adjusted earnings per share (EPS) rose just 2%.

The situation improved significantly in 2021 as more businesses reopened. The acceleration of its commercial business also offset the post-lockdown deceleration of its printing business, and its total revenue and adjusted EPS increased 12% and 66%, respectively, for the full year. Analysts expect its revenue and EPS to grow 4% and 13%, respectively, in 2022.

Stable growth with shareholder-friendly strategies

Warren Buffett usually favors cash-rich companies that return a lot of their free cash flow (FCF) to investors through big buybacks and dividends. Over the past two years, HP returned more than 100% of its FCF to its investors, even as its commercial business faced pandemic-related disruptions.

Data source: HP.

Its buybacks also reduced its number of outstanding shares by 30% over the past three years as its stock price rose more than 100%. This indicates the company isn't simply using buybacks to offset its dilution from stock-based compensation plans, and that its purchases were well-timed.

Apple (AAPL -0.20%), Berkshire's largest holding, also reduced its share count by 11% over the past three years as its stock price rose nearly 240%.

HP expects its FCF to rise to "at least" $4.5 billion in fiscal 2022 and to spend more than $4 billion of that cash on buybacks. As for its dividend, it currently pays a high forward yield of 2.9%, and it's raised that payout every year since it split with HPE.

It's still undervalued at its 52-week high

As of this writing, HP's stock still trades at just eight times forward earnings. By comparison, Apple has a forward price-to-earnings ratio of 30.

HP's stock is cheap because analysts expect its slowdown to continue as the remote work tailwinds fade, the chip shortage drags on, and the company braces for another long upgrade cycle for PCs and printers. Inflation, weaker consumer spending, and other macro headwinds could also reduce the market's near-term appetite for its products.

But Warren Buffett famously said: "Whether socks or stocks, I like buying quality merchandise when it is marked down." HP is clearly being marked down because investors anticipate a near-term slowdown.

However, HP merely faces a cyclical slowdown instead of a secular one. HP's sales of PCs and printers might ebb and flow with the hardware upgrade cycles, but the company will still keep generating plenty of cash for fresh buybacks and dividends. Those shareholder-friendly measures -- which likely drew Berkshire to HP -- indicate it's not too late to buy the stock.