Send me real-time posts from this site at my email
Motley Fool

Is HP Stock a Buy?

In the FAANG-dominated investing landscape, it's easy to forget that HP (NYSE: HPQ) was the original Silicon Valley stock. The company's roots date back to 1939, when its namesake founders, Bill Hewlett and Dave Packard, launched the company in a Palo Alto garage. In recent years, shares of the "old tech" company continue to underperform the overall technology sector, gaining 17% in the last three years versus 95% for the greater Nasdaq 100 index.

Many value investors are wondering if there's an opportunity here due to the company's attractive valuations: HP currently trades at 9.5 times forward earnings estimates. Additionally, the company's 3% dividend yield is enticing in a depressed yield environment. However, long-term investors should understand the risks before they buy shares of the company.

Image source: Getty Images.

HP's days of growth are long behind it

Investors can expect little revenue growth from HP, and that's partially by design. In 2015, then-CEO Meg Whitman spun off HP's higher-growth cloud computing and consulting services into a new company named Hewlett-Packard Enterprise.

The goal for the remaining legacy company, renamed HP Inc., was two-fold: maximize cash return from the existing personal systems (notebooks, workstations, and desktops) and printing businesses, and make a targeted bet on 3D printing for growth. To date, however, HP's foray into 3D printing hasn't been the significant growth driver management envisioned.

HP's other products are firmly in the no/low-growth mature stage of their lifecycles and are increasingly under threat from competition, most recently from software partner Microsoft's line of Surface computing devices. Furthermore, HP's printing division continues to be disrupted by digital transformation from the likes of companies like DocuSign.

In fiscal 2020, the company reported that full-year revenue decreased 4% from the prior year, yet the stock rallied because it beat expectations by $1 billion. Due to the pandemic, revenue for notebook computers posted double-digit sales growth. However, the pandemic negatively impacted HP's printing division, with sales down 12% year over year.

The long and short of the top and bottom lines

Eventually the pandemic will wind down, which should provide mixed results for HP. In its personal systems division, look for the top line to be negatively impacted. The pandemic created significant demand for notebooks that will eventually decrease, and this decline will not be fully offset by growth in work computers like desktops and workstations.

The personal systems segment provides the bulk (69%) of HP's total revenue, so it's likely the company will not post another significant top-line beat post-pandemic. However, the post-pandemic return to work should power HP's bottom line, as demand for products in its higher-margin printing division (17% versus 4.5% in personal systems) is temporarily reinvigorated.

However, these are all short-term effects and investors should consider the company's long-term prospects. The story there is more bearish. The shift toward increased mobile computing will persist -- especially as 5G connectivity adoption takes off -- and continue to crimp demand for traditional computing devices. Printing is also in a long-term decline. The pandemic increased the adoption of digital documents, and many businesses are likely to implement digital document processes going forward.

The company understands that it is in a mature industry and is responding by doubling down on its goal of returning shareholder capital. In February of 2020, HP announced its strategic value creation plan, which targeted $16 billion in capital return over the next three years, approximately half of its current market capitalization.

The company said it would return 100% of free cash flow generation, "unless higher-return opportunities emerge," which is increasingly seeming unlikely. Perhaps the returns from buybacks and dividends can fully offset the lack of top and (eventually) bottom-line growth. But there are other companies with yields greater than 3% that have better risk/reward profiles.

10 stocks we like better than HP
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and HP wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of November 20, 2020

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Jamal Carnette, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends DocuSign and Microsoft. The Motley Fool has a disclosure policy.


Source

Popular posts

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue