There are probably a few reasons behind Warren Buffett’s Berkshire Hathaway (BRK-A, BRK-B) continuing to gobble up shares of PC maker HP Inc. (HPQ) despite the industry’s year long downturn that has led to sales and profit declines.
Berkshire Hathaway revealed late Monday in a 13F filing with the SEC it increased its stake in HP by 16%. The Buffett-led Berkshire now owns 12% of the outstanding shares of HP. It’s one of Berkshire’s top 10 holdings. (Buffett originally disclosed an 11% stake in HP in April 2022.)
HP shares rose about 2% in pre-market trading on Tuesday.
Pros call out HP’s capital allocation as favorable to its investment story and perhaps explaining Buffett’s increasing ownership.
“HP is committed to one of the largest share repurchase programs (relative to market cap) within our coverage, so we think Berkshire’s involvement makes sense,” pointed out EvercoreISI analyst Amit Daryanani.
Under then-new HP CEO Enrique Lores in 2020, HP initiated a whopping $15 billion stock buyback plan. The company has gone onto repurchase about $13 billion of stock through January 31, 2023, under Lores’ leadership — supporting its bottom line by reducing shares outstanding and the stock price.
How can Buffett not dig all of that?
Meanwhile, in 2022 HP purchased workplace tech seller Poly for $3.3 billion — further strengthening its position in the hybrid work environment.
Buffett has long liked when companies widen their competitive moat.
Added Daryanani: “We view Berkshire’s ownership as a validation of HPQ’s strategy/capital return program.”
That’s not to say it has been smooth sailing for HP of late.
HP’s printer sales fell 5% from a year ago in the most recent quarter. Consumer and commercial PC sales declined 36% and 18%, respectively as the post-COVID PC hangover persisted. Earnings declined 32% year over year.
In Nov. 2022, the tech giant revealed a new $1.4 billion cost-cutting plan that will see it shed 4,000 to 6,000 employees by fiscal year 2025. That’s about 12% of HP’s workforce.
HP shares have fallen nearly 20% in the past year.
But in another nod to why the value-focused Buffett likely views the stock favorably, HP shares appear cheap.
The stock trades on a mere 8.8 times forward price-to-earnings according to Yahoo! Finance data, a steep discount to the S&P 500’s 18.7 times multiple. HP’s stock only trades on a trailing 12 month price-to-sales ratio of 0.5. Anything under 1 is often seen by value investors as a potentially attractive opportunity.
JP Morgan analyst Samik Chatterjee calls HP’s valuation “undemanding” in light of the positive sales catalysts longer-term.
“While the near-term headwinds are quite material, over the long term, we believe that the overall PC market will stabilize above pre-pandemic levels given a larger installed base post-pandemic and richer mix of premium PC models; additionally, we believe HPQ’s prioritization of Hybrid Solutions for both PC and Print should position the company well for at least maintaining its market share,” Chatterjee wrote in recent note to clients.
Originally published May 16, 2023 at 7:54 AM