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Berkshire Hathaway Piled Into HP, but Analysts Are Wary. The Pros and Cons of the Stock.Berkshire Hathaway Piled Into HP, but Analysts Are Wary. The Pros and Cons of the Stock. Barron's (Online); New York HP Inc. shares have surged to record highs after Berkshire Hathaway disclosed an 11.4% stake in the PC and printer giant—a bet that comes as some of the Street's more influential hardware analysts have turned cautious on the stock, setting up a classic bull vs. bear debate over the famous brand. Asked to comment, HP (ticker: HPQ) said in a statement: "Berkshire Hathaway is one of the world's most respected investors and we welcome them as an investor in HP Inc." The debate boils down to this: Bulls see a company that is well run, cheap in statistical terms, and aggressively returning capital to holders. Bears worry that after an unusual period of surging demand for personal computers, growth will slow from here. In the Securities and Exchange Commission filings disclosing the position, Warren Buffett's company didn't provide any particular reasoning for taking the stake in HP. But it isn't hard to see why Berkshire (BRK.A) might find it appealing. As Barron's has noted repeatedly, HP shares are cheap by almost any measure. In an October 2021 column , we described them as a "screaming buy." Maybe Warren took notice. Even with Thursday's 16% move in the stock, HP trades for a modest nine times expected earnings for the company's October 2023 fiscal year, and just 0.7 times sales. And the company remains exceedingly shareholder friendly. Over the past eight quarters, HP has repurchased 26% of its shares, and the company has promised to buy back at least $4 billion of stock in the current fiscal year. HP pays a solid dividend of 25 cents quarterly, for a yield of 2.8%. HP had unusually strong growth during the pandemic period because demand for PCs soared as many people shifted to working and learning from home. That was a particular boom time for HP, which is more skewed toward consumer PCs than Dell Technologies (DELL). Meanwhile, HP has been expanding its portfolio to include a broader range of peripherals. The company last year spent $425 million to buy the HyperX gaming peripherals division of the memory-products company Kingston Technology. A leader in gaming headsets for both PCs and gaming consoles, HyperX also sells keyboards, mice, mouse pads, USB microphones, and other accessories. And just last week, HP agreed to buy the headset and audioconferencing hardware company Poly (POLY) for $3.3 billion. As it happens. Barron's also called out Poly as a cheap stock last year. The deal comes at a relatively modest valuation of about two times projected forward sales. HP has said it expects the deal to provide an immediate boost to non-GAAP profits, and projected that the Poly business would be growing 15% per annum within three years after the close of the deal. Still, Berkshire's purchase comes just days after analysts at two of Wall Street's most influential firms turned cautious on the stock. Morgan Stanley analyst Erik Woodring last week cut his rating on HP shares to Underweight from Equal Weight, trimming his target price to $31, from $34. Woodring and other analysts expect demand for PCs to slow as the pandemic recedes. "PC and consumer hardware spending will be pressured as supply improves and demand normalizes after 2 years of above-trend growth," Woodring wrote in a research note. He thinks 2022 hardware budgets will come under pressure from a combination of macro factors, including rising Covid-19 cases in China, the Ukraine war, inflationary pressures, and a potential recession. His concern is that in a downturn, chief information officers will prioritize spending on software, services, and communications over PCs, data-center infrastructure, and printing. He projected a 6% drop in PC shipments in 2022. Goldman Sachs analyst Rod Hall likewise reduced his rating on HP shares last week to Neutral from Buy, with a similar rationale. "We note that PC demand has already moderated for low-end consumers, and we expect higher end demand to inflect by the end of this year," he said. "These demand trends could be exacerbated on the negative side by increasing pressure on the consumer economy, driven by inflation." He expects an 11% decline in PC unit sales this year. Paul Wick, portfolio manager of the Columbia Seligman Technology and Information Fund, meanwhile, made bullish comments on HP earlier this week in an interview on Barron's Live . He thinks the analysts are simply too bearish. "We've been big fans of Hewlett-Packard and CEO Enrique Lores, who has executed extremely well," he said. "Not only have PCs been strong, but right now we have this return to work, which is stimulating demand for office printers … and desktops and other commercial PCs are growing as well. Their PC business is staying flattish despite the dropoff in the consumer market and the printing business is recovering … and the company has been buying back 15% of their shares per year." Wick thinks HP can earn $5 a share in fiscal 2024, and he noted that the share count keeps shrinking, quarter after quarter. "It's not a sexy business, but it is better than people give it credit for," he said. Thanks to Warren Buffett, the market is giving HP more credit now. |
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