The bulls and bears are locked in a tussle over HP (HPQ 3.68%). The two views take opposing tones and cite vastly different explanations for their stances. But one camp includes Warren Buffett. Here's what the two sides are saying.
Bears
Demand for PCs ebbs and flows along with technological advancements and replacement cycles. HP bears are beginning to notice a downcycle in the PC market and don't like what they see. Global PC shipments were down 11% in the second quarter, and HP took the brunt of it, shipping 27% fewer PCs during the quarter.
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PC shipments are expected to continue to fall by 13% in the 2022 calendar year to about 305 million units, then fall further in 2023. There is good reason for the pessimism. After a COVID-plagued 2020, folks became entrenched in the work-from-home and school-from-home environments, which fueled excess demand for PCs from employees and students across the globe in 2021. For its fiscal year ending in October 2021, HP's revenue popped more than 12% to $63.5 billion -- HP's highest as a stand-alone company.
After such an incredible run, there will be little need to replace all those new PCs any time soon. But the bears might argue that there is more than just replacements to be concerned about. Economists are growing wary of a global recession this year or next. A slowdown would likely force many consumers and businesses to forego new computers for a while.
Key Data Points
HP's third fiscal quarter report may be evidence of the bears' case. In it, the company reported a 4.1% fall in revenue. The company also lowered its adjusted earnings per share guidance for the second straight quarter, to between $4.02 and $4.12.
Bulls
One of HP's most renowned bulls is Warren Buffett. His company, Berkshire Hathaway (BRK.A +0.62%) (BRK.B +1.26%), invested about $4.1 billion in 121 million shares of the stock. The stake represents roughly 11% of HP's outstanding stock. Buffett is a huge fan of companies that generate massive amounts of free cash flow that you can buy on the cheap.
Though the company may be experiencing a slowdown in the near term, it's still producing significant cash flow. HP expects to reap free cash flow between $3.2 billion and $3.7 billion for its fiscal year. Year to date, the company has used $3.5 billion to repurchase shares -- another favorite action of Buffett. Those repurchases retired nearly 100 million HP shares, or about 9% of its beginning-of-the-year share count.
Of course, Buffett wouldn't buy the stock unless it offered value. Based on HP's earnings per share forecast, the stock trades at a forward price-to-earnings ratio of seven times. Taken another way, if you bought a share of HP at its current price of about $28.50, you'd earn about $4.07 per share this year, or 14.3% of your money. Not bad, considering you'll also get a dividend yield of 3.5% while you wait for the PC cycle to return to growth.
Who's the winner?
The obvious difference between the bull and bear cases is that the bear case takes a short-term view, and the bull case takes the long view. Buffett's disciples can quickly tell you that Buffett is a long-run investor with every stock he owns. Like the rest of the bulls, he likely thinks the PC market will eventually regain its footing. When you add in an attractive valuation, share buybacks, and a dividend, I think the bulls have this one. There's better news. The stock is down since Buffett bought the shares, so adding it to your portfolio now will get you a better price than the Oracle of Omaha paid.
