HP Inc. (HPQ, Financial) is a multinational information technology corporation based in the United States that provides imaging and printing systems, computing systems, mobile devices, solutions and services to businesses and individuals across the world. The company operates through three business segments:
- Personal Systems: commercial and consumer PCs, workstations, tablets, mobile devices, POS systems, software and customer support services
- Printing: printer hardware, supplies, solutions and services and scanning devices
- Corporate Investments: HP Labs and certain business incubation projects.
HP Inc. released its fiscal second-quarter earnings on May 27, beating analyst expectations for both earnings and revenue. The company reported earnings of 93 cents per share, which topped the analyst consensus estimate of 89 cents per share.
Since the beginning of the year, HP shares have gained around 19%, primarily driven by the favorable macroeconomic conditions and the positive sentiment toward equities among investors. Even on the back of triple-digit gains in the last 12 months, however, I believe HP remains in a strong position to generate substantial shareholder wealth in the future.
Earnings recap and the outlook for HP
The company reported net revenue of $15.9 billion for the April quarter, up 27.3% from the previous year. Personal Systems net revenue was $10.6 billion, where consumer net revenue increased 72% and commercial net revenue increased 10%. The Printing segment reported revenue growth of 28%, highlighting that the company is firing on all cylinders.
To provide a better customer experience, the company remains focused on upgrading its print service portfolio, and it recently announced the expansion of HP+, an instant ink, which is now available in 35 countries across North America and Europe. In 3D, HP is partnering with Ford Motor Company (F, Financial) to convert used 3D printed parts into auto parts for F-250 trucks, establishing a waste-free loop.
Exhibit 1: Net revenue by segment and region
Source: Investor presentation
Net cash by operating activities was $1.4 billion for the second quarter and free cash flow came in at $1.3 billion. The company also returned $1.8 billion to shareholders via buybacks and dividends. HP used $1.6 billion in cash to repurchase approximately 53.5 million shares of common stock in the open market and distributed a dividend of close to 19 cents per share as well. The company had $3.4 billion in gross cash at the end of the quarter, which included cash and cash equivalents and $12 million in short-term investments.
Exhibit 2: Shareholder distributions
Source: Investor presentation
Commenting on HP's strong quarterly performance and market opportunity, company CEO Enrique Lores said:
"In the education market where HP is the number one vendor, PC sales have more than doubled due to remote learning. At the same time, however, the number of PCs per hundred students remains in the single digits. As an industry, we still have a long way to go to close this digital device and as a company, we have a big opportunity to be part of the solution. The importance of the PC extends far beyond work and school. In many cases, this has become the entertainment center of the home, from streaming and content creation to the rise of gaming and eSports. In Q2 revenue growth in gaming outpaced overall consumer PC growth. We are building on this strength to expand into attractive adjacencies, including peripherals. We are on track to close a hyper acquisition in Q3."
By 2025, HP plans to be carbon neutral, with zero waste in its operations and zero-deforestation for HP paper and paper-based packaging. By 2040, the company plans to achieve net-zero carbon emissions throughout the whole value chain. HP established a new set of diversity and inclusion targets as part of its social responsibility, including a target to achieve 50-50 gender equality in HP leadership by 2030, making it the first Fortune 100 tech firm to do so. These sustainable initiatives are likely to attract ESG-focused investors, which in return is likely to lead to an expansion in valuation multiples.
Industry outlook
In 2020, the global lockdown had a major influence on the computer hardware business. Supply chain disruptions and expectations resulting from the shift to a new normal forced companies across the entire electronics value chain to reimagine and redesign their business operations. Although hardware spending declined, demand for devices that facilitate remote working surged in 2020 due to pandemic-related measures.
According to Business Research Company, the global computer hardware market was valued at $862.93 billion in 2020 and is expected to reach $944.09 billion in 2021, growing at a compounded annual growth rate of 9.4%. HP, Apple, Inc. (AAPL, Financial) and International Business Machines Corporation (IBM, Financial) are among the key players in the computer hardware market. North America dominated the industry in 2020, accounting for 43% of the total global market share, followed by the Asia Pacific region, which accounted for 29% of the market. The billion-dollar infrastructure development projects carried out by governments in Asia are likely to trigger a supercycle of demand for electronic devices in this populous region, and HP stands to benefit from this favorable trend.
The industry is also likely to benefit from a surge in investment in smart city projects in several countries.
Takeaway
HP has a unique position in the computer hardware and software sector and is poised to take advantage of favorable macroeconomic developments. It would be reasonable to conclude that the global lockdown will lead to a permanent increase in the number of organizations supporting remote working, and HP is well-positioned to benefit from this development. There is a substantial increase in demand for distance learning as well, which is good news for PC and other electronic device manufacturers. At a forward earnings multiple of 8.5, HP is one of the most cheaply valued tech giants, which makes the company attractive for both value and growth investors.
Disclosure: The author owns shares of Apple and Ford.
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