Is HP Stock a Buy Now?

HP's (HPQ -0.11%) stock rose 4% on June 1 after the PC and printer maker posted its second-quarter earnings report. Its revenue rose 4% year-over-year to $16.5 billion, which beat analysts' estimates by $310 million.

Its adjusted net income dipped 1% to $1.2 billion, or $1.08 per share, but still topped analysts' expectations by three cents. On a generally accepted accounting principles (GAAP) basis, its net income fell 19% to $1.0 billion.

HP's growth rates seem tepid, but investors often own its stock for stability and income instead of aggressive gains. Should investors buy HP's stock as rising interest rates drive investors away from riskier assets?

Image source: Getty Images.

Reviewing HP's core businesses

HP generated 70% of its revenue from its personals systems segment, which sells notebooks, desktops, and workstations, during the second quarter. The remaining 30% came from its printers, printing supplies, and printing services. Here's how those two core businesses fared over the past year:

Data source: HP. YOY = Year-over-year.

HP's sales of consumer-facing personal systems accelerated throughout the pandemic as more people upgraded their PCs for remote work, online classes, and video games. That growth largely offset the slower growth of its commercial-facing PCs as businesses closed down.

But over the past three quarters, HP's sales of consumer PCs declined year-over-year as the lockdown measures ended. Fortunately, its sales of commercial PCs accelerated again and offset that slowdown.

That trend continued in the second quarter. HP's sales of consumer personal systems declined 6% year-over-year, but that drop was offset by its 18% growth in commercial sales.

HP's printing business faced similar challenges. Its sales of consumer printers surged during the pandemic as more people bought printers for DIY projects but quickly tumbled in a post-lockdown market. Its sales of commercial printers also declined throughout the pandemic, but only rebounded slightly (and failed to offset its decelerating sales of consumer printers) as more businesses reopened.

As a result, HP's consumer and commercial printing revenues fell 12% and 4% year-over-year, respectively, in the second quarter. Its sales of printing supplies also declined 6%.

Simply put, HP's PC business remains strong, but its printing business continues to struggle with lengthy upgrade cycles, the rise of paperless offices, and competition from generic ink and toner suppliers.

Its operating margins are holding steady

HP's non-GAAP operating margin declined 30 basis points year-over-year, but remained roughly flat sequentially at 8.8% in the second quarter.

Data source: HP. *Non-GAAP basis.

Its personal systems' operating margin improved year-over-year as the segment benefited from favorable pricing and lower R&D expenses, but it faced some quarter-over-quarter pressure from "more competitive pricing" in the crowded consumer segment and sequentially higher R&D costs.

Its printing operating margins rose both sequentially and year-over-year thanks to a favorable mix of higher-margin products, lower sales commissions, and the growth of its subscription-based Instant Ink service.

Focusing on shareholder returns instead of revenue growth

HP didn't provide any revenue guidance for the full year, but analysts are expecting just 3% revenue growth. However, HP now expects its non-GAAP earnings per share (EPS) to increase 12%-16% for the full year -- compared to its prior guidance for 10%-16% growth.

A lot of that growth will be driven by big buybacks. Over the past two and half years, HP returned more than 100% of its free cash flow (FCF) to its investors via buybacks and dividends.

Data source: HP.

Those shareholder-friendly measures enabled HP to reduce its outstanding shares by 37% over the past five years while supporting its forward dividend yield of 2.6%. It's also raised that dividend every year since it spun off Hewlett-Packard Enterprise (HPE) in 2015.

HP expects its annual FCF to grow "at least" 7% to $4.5 billion in 2022, even though CFO Marie Myers predicted the company would face a "challenging macro environment" during the conference call.

A safe stock with a low valuation

HP is an ideal tech stock to own during a market downturn because it's firmly profitable, generates plenty of cash, and plows its FCF into generous buybacks and dividends. It's also incredibly cheap at eight times forward earnings.

That's probably why Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) acquired more than 11% of HP earlier this year -- and why investors should follow the Oracle's lead and accumulate some shares of this safe haven stock.