HP Inc. (HPQ) in Palo Alto, Calif., provides personal computing and other access devices, imaging and printing products, and related technologies, solutions, and services worldwide. HPQ shares have gained 60.9% in price over the past year and 43.5% year-to-date to close yesterday’s trading session at $35.28. The stock is currently trading above its 50-day and 200-day moving averages.
The computer hardware giant posted better-than-expected fourth-quarter results and a robust outlook for the year, and its stock rose in price on Nov. 24 on the news the company’s net revenue increased 9.3% year-over-year to $16.68 billion, which was $1.25 billion more than the consensus expectation. The revenue increase can be attributed mainly to the company’s growth in the PC business and higher average selling prices. According to UBS analyst David Vogt, average selling prices were up more than 6% sequentially for HPQ in the quarter. Its non-GAAP net earnings came in at $1.08 billion, indicating an increase of 28.9% year-over-year, while its EPS was $0.94, beating the Street estimate by 6.8%.
The demand for HPQ’s PC is growing rapidly and is outpacing supply. HP CEO Enrique Lores expects robust demand ahead for both PCs and printers as offices reopen. Moreover, the company ended the quarter with a higher-than-normal order backlog, particularly in PCs. As more workers return to office and enterprise technology spending gears up, demand should increase, eventually generating revenues. “We believe the handoff to enterprise strength as workers return to the office in a hybrid manner will boost commercial PC demands for multiple quarters,” said Citi analyst Jim Suva. For its fiscal year 2022, HPQ expects its non-GAAP diluted net EPS to be in the range of $4.07 – $4.27 and to generate free cash flow of at least $4.50 billion.
Here’s what could shape HPQ’s performance in the near term:
HPQ Looks undervalued at its Current Price level
In terms of forward P/E, HPQ is currently trading at 8.88x, which is 69.3% lower than the 28.97x industry average. Also, its 0.68x forward EV/Sales is 83.7% lower than the 4.17 industry average. Furthermore, HPQ’s forward EV/EBIT and Price/Sales ratio of 7.99 and 0.62, respectively, are 61% and 84.6% lower than the industry averages.
Attractive Capital Return Structure
HPQ repurchased $1.80 billion of stock in the latest quarter, driving the total for the fiscal year to $6.20 billion. Furthermore, management plans to buy back another $4 billion of stock in HPQ’s current fiscal year. This should improve shareholders’ value.
HPQ increased its dividend to $1 annually from 78 cents in October, which yields 2.8% at the current share price. The company also declared a cash dividend of $0.25 per share, payable on January 5, 2022, representing an increase of approximately 29% from the prior dividend. HPQ’s dividend payouts have increased at an 11.6% CAGR over the past three years. The company has a record of 11 consecutive years of dividend growth.
HPQ’s 10.24% net income margin is 61.7% higher than the 6.33% industry average. And its ROA and ROTC of 16.84% and 65.47%, respectively, are 371.3% and 1,228% higher than the industry averages.
POWR Ratings Reflect Growth Prospects
HPQ has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a grade of A for Value, which is consistent with its lower-than-industry valuation multiples.
HPQ has a B grade for Quality. Its high ROA and ROTC justify this grade.
Of the 52 stocks in the Technology – Hardware industry, HPQ is ranked #11.
Beyond what I have stated above, one can also view HPQ’s grades for Sentiment, Growth, Momentum, and Stability here.
View the top-rated stocks in the B-rated Technology – Hardware industry here.
HPQ reported a solid fourth-quarter result with a robust outlook for the year, thanks to the growth in commercial sales of personal computers. The company expects strong demand to continue. Also, analysts expect HPQ’s EPS to grow 10.9% in the current quarter and 22.4% per annum over the next five years. So, we think the company’s high profitability and reasonable valuation make it an ideal bet.
How Does HP (HPQ) Stack Up Against its Peers?
HPQ has an overall POWR Rating of B. However, one could also check out these other stocks within the Technology – Hardware industry with an A (Strong Buy) rating: Digi International Inc. (DGII), Canon, Inc. (CAJ), and Murata Manufacturing Co., Ltd. (MRAAY).
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HPQ shares were trading at $37.01 per share on Wednesday afternoon, up $1.73 (+4.90%). Year-to-date, HPQ has gained 53.45%, versus a 23.12% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...
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