As the markets fell in the first quarter of the year, Warren Buffett's Berkshire Hathaway continued to put money to work in several stocks. One of the largest new positions in the portfolio was computer hardware leader HP (HPQ 1.55%).
Keep in mind that Berkshire has two investing deputies -- Todd Combs and Ted Weschler -- who oversee about 10% of the company's equity investments, so it's possible HP could have been purchased by either of these guru investors. But it's just as likely that HP was bought by the Oracle himself. It's a leader in the computer hardware market that has all the hallmarks of what Buffett looks for these days in a stock, including savvy capital allocation by management and shareholder-friendly capital returns. HP has been returning all of its free cash flow to shareholders through dividends and share repurchases.
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While HP might not offer exciting returns like growth tech stocks, it could be a great value to pounce on during the market sell-off for a few reasons.
HP has consistency on its side
In terms of its competitive advantage, HP is not in the same league as other iconic brands that Buffett is known to favor, such as previous large investments in Coca-Cola or Apple. However, HP is a well-entrenched computing solutions provider that has been around for ages and continues to pump out steady operating results. Although it recently lost market share in PC shipments to Dell Technologies, Apple, and ASUS, HP holds a solid second-place position in the industry with an estimated 20.4% share of the PC market in the first quarter, according to Gartner.
HP should continue holding its own against these rivals. Other than its name recognition, HP offers a broad product portfolio spanning computing hardware, peripherals, hybrid work solutions, and printing services. Its greatest strength might be its wide distribution capability across retail, direct sales efforts, and commercial channels.
The stock has historically traded at a low valuation. It currently trades at just 7.1 times earnings per share, which is really cheap considering the average stock historically trades around a price-to-earnings (P/E) ratio of 15. HP's low P/E ratio is due to the company's low rate of growth and concerns over a competitive PC market. And then there's the printing segment, where many businesses are rapidly shifting to digital documentation services, which could cause some problems for HP's printing solutions business, which made up roughly a third of its total revenue in the recent quarter.
But in many ways, the concerns over growth and competition are overblown. HP has managed to deliver steady growth in revenue and profits in recent years, and there are other attractive opportunities emerging on the horizon.
HPQ PE Ratio data by YCharts.
During the most recent business update at the end of May, CEO Enrique Lores said, "We remain committed to building a more growth-oriented portfolio." Management has been investing behind faster-growing markets where it can leverage its leading PC and printing brand to create value for investors. These areas include gaming, peripherals, printing subscription services, remote work solutions, and 3D printing.
HP is building a leading gaming peripherals brand in a growing market that is expected to reach $12.2 billion by 2024. In 2021, HP acquired one of the leading brands in this market, HyperX, for $425 million.
In March, HP announced its intention to acquire Poly, a provider of workplace collaboration solutions, for $3.3 billion in an all-cash transaction. The deal is expected to close by the end of calendar 2022 and positions HP for more growth in the hybrid workspace, where companies are adjusting their meeting rooms to accommodate a remote workforce.
In the first half of fiscal 2022 (through April 30), these growth-oriented businesses grew by double-digit percentages. As a group, management expects these businesses to generate $10 billion in revenue for the full fiscal year (which ends in October), which should represent over 15% of the company's revenue.
Why the stock could outperform
Over the next five years, analysts expect earnings per share to grow at a compound annual rate of about 7% per year. That rate of growth is not going to make shareholders a high return by itself. But another factor that could grow earnings faster is management's share repurchase program, which is gradually reducing the share count and boosting growth in earnings per share. Over the last 20 years, HP has reduced its shares outstanding by 64%, 37% in the last five years.
Considering management's focus on high-growth markets, the stock's low price-to-earnings valuation, a dividend yield of over 2%, and the impact on earnings growth through share repurchases, there is a good chance HP could outperform the broader market over the next few years.
