Stock HP isn’t as impossible to own as you might think


If you are reading this, you probably already know this IT company HP (HPQ -1.88%) struggled last trimester. In total, the company reported a 25% year-over-year drop in the number of computers sold during its third fiscal quarter, which ended in July.

Significantly higher prices could not fully offset this low volume. Revenue of $14.7 billion in the third fiscal quarter was down 4.1% year over year, below analysts’ expectations for revenue of $15.6 billion. Earnings of $1.04 per share were in line with expectations and slightly up from the prior year figures. Those 2021 numbers, however, aren’t a particularly difficult comparison. Perhaps worst of all, CEO Enrique Lores foresees continued weakness ahead; the company reiterated its full-year earnings forecast.

The 8% sell-off in HP shares that immediately followed the release of its fiscal third-quarter numbers has since widened to nearly 11%, dragging the stock 30% below its June peak.

This large pullback, however, translates into a buying opportunity despite the bearish outlook for the personal computer sector. In fact, HP could exit the IT business altogether right now, and the stock would still likely be worth more than its current price. Why? Because printers and printing supplies are a much bigger, better, and more resilient business for this company than the market gives it credit for.

Revenue versus profit

Yes, personal computers are HP’s biggest business in terms of revenue. In the last quarter alone, it did $10.1 billion in personal systems business, which is 69% of its total revenue. The remaining 31%, of course, is related to printing. These proportions are in line with the company’s long-term standards.

Data source: HP Inc. Graph by author.

However, what’s still vastly understated about the mix of HP’s business is that profit margins on computers are notoriously thin, while profit margins on printers and printing supplies are surprisingly wide. While HP doesn’t provide those particular details in its disclosures or filings, a bit of segment-specific revenue and operating profit rate numbers tell the story.

HP's biggest profit center, however, has always been printers and printing supplies.

Data source: HP Inc. Graph by author.

HP generally earns more from its printing business than from its PC business. The surge in computer purchases at various times during the pandemic briefly changed this dynamic. For most of this year, however, momentum has returned to its norm.

But this is not the most important point to emphasize here.

Why HP Stocks Are Undervalued

In the first half of the current calendar year, HP’s printing arm made an operating profit of just under $2 billion. Given its history, there’s no reason to think this unit will stray from its usual $3.6 billion annual figure either this year or next. At the same time, thanks to the recent slowdown in PC sales, HP’s computing business appears to be on track to return to its typical annualized earnings of around $3.0 billion.

Here’s the thing: With a market cap of just under $30 billion, a price-to-earnings ratio of just 5.1, and a forward price-to-earnings ratio of just 6.5, the market has arguably already priced in a complete and continuing collapse of HP’s personal computing business, and more. In other words, even after removing non-operating expenses such as taxes and interest payments, HP’s printing business alone could still sustain a stock price higher than its current price. close to $28.

And printing is certainly a more resilient profit center. While individuals and businesses typically only replace computers once every few years (four years is the rough average), businesses and consumers who print documents regularly need new toner and ink all year round. .

This demand doesn’t exactly implode either.

Although the advent of the PC once generated a lot of hype around the idea of ​​the “paperless office”, technology researcher IDC estimates that the world printed 2.8 trillion documents in 2020, down from just 14% from 2019 levels, even amid pandemic-driven stay-at-home mandates. While the number of materials printed globally each year has been slowly declining for some time, low single-digit declines are the norm here and will continue to be through 2025, according to IDC.

Connect the dots. PC headwinds or not, HP’s printing business alone makes the stock worth its current value. Key to its share price rally will be wider recognition among investors of this reality, which may take time to develop.


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