HP's (HPQ -0.46%) stock price is down about 20% over the past three months over concerns that its sales of PCs and printers have stalled out in the post-pandemic market. Its revenue has declined year over year for five consecutive quarters, while IDC expects global PC shipments to drop 14% in calendar 2023 before rising a mere 4% in 2024.
That's probably why Warren Buffett's Berkshire Hathaway -- which became HP's largest single shareholder over the past year -- gradually reduced its stake from 12% to less than 10% as its stock tumbled. Berkshire's retreat suggests HP's stock still isn't a bargain at 8 times forward earnings.
Image source: HP.
However, HP recently provided some encouraging updates for the bulls during its annual analyst meeting on Oct. 10. Let's review the four most important bullet points from that meeting -- and how they raise a few green flags for HP's future.
1. HP expects the PC and printing markets to keep expanding
The bears often claim HP will continue to struggle with longer PC upgrade cycles, competition from mobile and hybrid devices, and sluggish demand for new printers. Yet HP still expects the PC and printing markets to continue expanding.
In its analyst presentation, it predicted the total addressable market (TAM) for PCs would still grow at a compound annual growth rate (CAGR) of 4.4% from calendar 2023 to 2026, partly driven by the secular expansion of the hybrid work and artificial intelligence (AI) markets. It expects the TAM for printers to expand at a slower CAGR of 0.9%, but it believes the growth of its industrial printing, 3D printing, and subscription-based services will offset the softer demand for its legacy printers and supplies.
2. HP's EPS and FCF guidance remains stable
As HP's near-term growth cools off, it's been cutting costs and streamlining its business through its "Future Ready Transformation Plan," which it unveiled last November. It's laying off 7% to 10% of its workforce by the end of fiscal 2025; reducing its total number of unique PC models; launching new products for the higher-growth hybrid work, gaming, industrial graphics, and 3D printing markets; and introducing more subscription-based services to boost its gross margin.
HP's latest adjusted earnings-per-share (EPS) and free-cash-flow (FCF) forecasts for fiscal 2024 suggest those turnaround efforts are paying off. During the analyst presentation, it predicted it would generate an adjusted EPS of $3.25 to $3.65 for fiscal 2024 (which ends next October). That forecast, which broadly meets Wall Street's expectations, would represent a slight improvement from its target adjusted EPS of $3.23 to $3.35 for fiscal 2023.
HP expects to generate $3.1 billion to $3.6 billion in FCF in fiscal 2024, compared to its current target of $3 billion for fiscal 2023. It also raised the forecast for its annualized cost savings run rate by $200 million to $1.6 billion by the end of fiscal 2025.
3. HP raised its dividend
Along with that rosier bottom-line forecast, HP raised its annual dividend by 5% to $1.10 per share, which gives it a forward yield of 4.1%. That dividend hike wasn't too surprising -- since HP had only spent 35% of its FCF on its dividends over the past 12 months -- but its rising yield could complement its low valuation and limit its downside potential.
4. HP could resume its stock buybacks soon
HP paused its buybacks over the past two quarters to conserve more cash for its "Future Ready Transformation Plan" and dividend payments. That strategy makes sense in the current macro environment but it likely disappointed Warren Buffett, who has famously touted the importance of big buybacks.
But during its analyst day presentation, HP said it was still committed to returning "at least 100%" of its FCF to its investors through dividends and buybacks. That statement, along with its increased FCF guidance for fiscal 2024, implies it will start repurchasing its shares again once the macro environment improves and its core businesses stabilize.
But do these green flags indicate it's safe to buy HP's stock?
These announcements all counter the bearish notion that HP's business is headed off a cliff. However, they also don't make it a much more compelling long-term investment for the bulls, especially when there are plenty of better tech dividend stocks to choose from. Therefore, my opinion of HP is the same as before -- it's a cheap dividend stock with an above-average yield, but it will likely underperform the broader market until the PC and printing markets finally recover.
