Warren Buffett (Trades, Portfolio) has been on a shopping spree this past quarter based on Berkshire Hathaway's (BRK.A, Financial)(BRK.B) latest 13F report and other regulatory filings. One company that Buffett's conglomerate has been investing into is HP Inc. (HPQ, Financial), a blue chip technology manufactuer which specializes in personal computers and printers.
Berkshire's HP purchase was annouced in several filings. It was first picked up sometime in the first quarter of 2022 based on the 13F report, and more recently, Buffett's conglomerate revealed in Form 3 and Form 4 SEC filings dated April 6 that it continued adding to the position. These purchases together total 121 million shares, worth an estimated worth an estimated $4.2 billion. This now makes Warren Buffett (Trades, Portfolio) the largest shareholder of the company with an 11.48% stake.
HP’s share price is up by over 132% since the April 2020 lows, so it's not like Buffett is buying a dip. Let's dive into the business model, financials and valuation to see what might have attracted Buffett to this stock even on a price uptrend. Please note, I do not have any insider knowledge of Buffett's thoughts; this is all my personal speculation.
HP is a blue chip technology company that focuses on personal computers and printing, which includes market-leading 3D printers. It should not be confused with Hewlett Packard Enterprises (HPE), as the two companies split up in 2015.
According to the company's first-quarter 2022 earnings report, they make 72% of their revenue from the Personal Systems segment of the business (i.e. laptops, notebooks, computers, etc.) and 28% from Printing. HP operates globally with 40% of sales coming from North America, 35% from Europe, the Middle East and Africa and 25% from Asia/Pacific including Japan.
The company has seen strong demand in their Personal Systems segment and released a variety of new lightweight notebook devices and gaming PCs at the CES Exhibition 2022. Their printing segment saw softer demand in the quarter thanks to an ongoing recovery in office printing.
HP is invested heavily into hybrid work solutions, and on March 28, it announced the acquisition of Poly, a leader in video conferencing solutions, cameras, headsets, voice and software. This acquisition will help drive the Peripherals and Workforce Solutions parts of HP’s business, which are estimated to have $100 billion and $200 billion market potential, respectively, growing at 8% and 9% globally.
The company also recently announced the acquisition of Choose Packaging, a leading ecopacking provider which owns the patent to the only commercially available zero-plastic paper bottle in the world.
Financials and recent earnings
HP produced strong first quarter results with net revenue of $17.0 billion, up 8.8% from the prior-year period. This growth was driven by their Personal Systems segment, which produced the majority of their revenue ($12.2 billion) and grew at a rapid 15% pace year over year. Breaking things down further, their Commerical net revenue increased by 26%, while total unit shares for Notebooks and Desktops were down 6% on average.
The company's Printing net revenue came in at $4.8 billion for the first quarter, which was down 4% year over year. The higher operating margin of 18.2% was not enough to make up for a slowdown with hardware units decreasing by 28%.
Earnings per share (EPS) for the first quarter came in at $0.99, which was above the prior outlook range of between $0.92 and $0.98. Free cash flow was $1.4 billion.
HP reported a strong gross margin of 21.33% and an operating margin of 8.90%, which have both been trending up since the end of 2019 despite a longer-term downtrend.
HP is trading at its lowest price-earnings ratio since 2016 at 6.19, which is in line with competitor Dell (DELL, Financial) with a price-earnings ratio of 5.68. Apple (AAPL, Financial) trades substantially higher with a price-earnings ratio of 22.34, mainly due to their higher margins, strong brand and diverse product offering.
According to the GF Value Line, a unique intrnisic value calculation from GuruFocus, the stock is fairly valued.
HP is a legacy blue chip technology company which is reinventing itself with acquisitions in both the hybrid work and ecopackaging industries. The company has seen strong demand in its Personal Systems segment and high revenue growth as a business overall. However, their printer segment is seeing softer demand from the commercial industry, and this could be a sign of more pain to come.