29 Oct HP Inc (HPQ)
For PC makers, the past few years have been a wild ride. From the heady days of the pandemic which saw demand skyrocket to the more recent computer chip and component shortages that have plagued many industries, it’s been extremely tough to gauge their success. Today’s stock report subject HP Inc is a case in point. It’s been flying high and swooping low, and the share price has acted accordingly. Now well down from its May highs the stock looks to be at a juicy valuation and could well be at a crucial turning point. So is it worth getting long?
HP Inc came into existence in 2015, spinning out of the original Hewlett-Packard which began life in a one-car garage in Palo Alto. The HP garage is now considered the “birthplace of Silicon Valley”. The split-up saw HP Inc take on the PC and printer business while HP Enterprise became responsible for the server storage and networking business. Originally best known for its printer and toner products, its innovation and brand name helped Hewlett-Packard become a major player in the PC and peripherals market.
HP took over the mantle of the number one seller of global PC sales from Dell in 2007 before it was overtaken by Chinese PC maker Lenovo in 2013. It briefly regained first place in 2017 before Lenovo once again took over the next year. Despite the back and forth, HP has increased their total percentage market share of global PC sales every year from 2012 to 2020 – owning 16.1% in 2012 to the 21.2% it holds now. Lenovo holds 24.99%, Dell is in third place with 16.4%, Apple in fourth with 8.2%, with Asus and Acer rounding out the top six with 6% and 5.9% respectively.
The big players all increased PC sales during the pandemic as total sales increased by 13% in 2020 to levels not seen since 2014. The work from home boom and the onset of remote learning for students saw a massive rush for home PC equipment. Sales were up again in the first quarter of 2021, higher by 32% on the same quarter the previous year. It was the highest PC growth rate since it started being tracked in 2000. 69.9 million PC’s were shipped in the quarter, the largest since 2015 when 71.7 million were sold in the first quarter.
Analysts are advising that PC sales can’t keep up this massive pace and that’s undoubtedly true. However, forecasts for huge falls in PC sales as workers head back into offices just don’t seem to add up. We’ve talked numerous times about how the new home/work hybrid model is here to stay. We won’t go over it again here, but you can go back and read our recent reports on Poly Inc (POLY) and Logitech (LOGI) to see where we sit on the issue:- https://capital19.com/investing-in-us-stocks/poly-inc-poly/ and https://capital19.com/investing-in-us-stocks/logitech-logi/
This concern over PC sales is a large reason for the HP share price falling from $36 in May back down to $29 today. However, CEO Enrique Lores sees it differently. At its 2021 Securities Analyst Meeting last week Lores stated, “We are seeing a profound shift in the role technology plays in people’s lives. Traditional boundaries have been erased and work has forever changed, creating significant long-term tailwinds for our categories. The hybrid offices of the future will be more distributed. More than 2/3 of office workers expect to work from home 3 or more days per week next year. This aligns with the approach we’re taking at HP, where a majority of employees will have hybrid roles. To prepare for this shift, many IT departments are planning to deploy multiple devices per employee. And they are exploring ways to enable workers to collaborate and praise remotely. This broad-based proliferation of devices is also driving demand for peripherals that create more immersive experiences.”
At the same meeting, HP lifted its outlook for non-GAAP profits for 2022 to $4.07-$4.27 per share, where the market is expecting $3.78. They also lifted the dividend by 29% to $1 per share. HP thinks their share price is cheap and plan to return 100% of its 2022 fiscal cash flow back to shareholders via dividends and buybacks. It’s always a great sign when management is confident in their brand. Of course, they acknowledge it won’t be all clear sailing. They expect sales to moderate and for their supply issues to continue through to the middle of next year. However, the bright side is that they are selling out during the shortage (Lores advised shareholders “we are selling everything we can produce”) and will be able to expand when the issues further up the line are resolved.
At the moment the crowd is against HP Inc. They have a price to earnings ratio of just 9.3 and forward earnings of 8 (the S&P500 average is at 31.3 and 22.3). The expected fall in PC sales along with the chip shortages and supply line issues are keeping investors away. But of course, that is usually the best time to get on board. When a company has been beaten down but still has plenty of upside. HP has a history of increasing market share and its in an industry where future size predictions are smaller than make sense considering the change in working habits. The company is backing itself and I think it would be wise to consider doing the same.