Buffet Radar: Buy HP (HPQ)
That HP's consumer-facing PC and printing industries, which both saw growth spikes during the pandemic as more people worked from home, are currently experiencing supply chain issues and cyclical slowdowns in a post-lockdown market, were not a surprise given the lackluster growth rates.
Even as its near-term revenue growth slows, $HPQ steady growth rates, low valuation, and high yield should limit its downside risk. As a result, over the next 12 months, it probably won't provide significant gains. Still, it should hold steady or gradually rise as investors turn to cheaper dividend companies due to rising interest rates and other economic challenges.
It will certainly still see a severe decline throughout fiscal 2023, though. Revenue at HP has already decreased year over year for two straight quarters, and growth won't pick up soon. Moreover, Lores anticipated on the call that global PC sales would drop 10% the following year and level off before the pandemic.
That's a little more pessimistic than other sector predictions. For instance, according to IDC, sales of PCs and tablets would drop 2.6% in calendar 2023 before increasing again in 2024. The research company predicts that when the sector recovers from the pandemic between 2022 and 2026, the market will develop at a meager CAGR of 0.8%.
A weak PC market, though, isn't HP's only issue. Long upgrade cycles, paperless offices, and competition from generic ink and toner vendors will likely continue to constrain its printing industry. Expanding its more recent 3D and metal printing businesses may help HP reduce some of that pressure. Still, the consumer and commercial sectors account for most of their printing sales.
Over the previous two years, HP has thrown money at shareholders in dividends and share buybacks. Dividend payments totaled $2 billion in fiscal years 2021 and 2022, while share repurchases increased by almost $10 billion. HP borrowed money to pay for a portion of this expenditure, and HP had $11.2 billion in debt and $3.2 billion in cash at the end of the fiscal year 2022.
The temporary headwinds won't last forever, and the stock has much pessimism. However, with a P/E of just 9.3 and a 3.7% dividend yield, $HPQ remains undervalued.
Source: Yahoo Finance