HP takes off on Berkshire News. Major analysts are wary of the stock.

HP and Dell rode a wave of PC demand when the pandemic hit, but analysts are now worried about the outlook.

The time of dreams

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HP Inc.
.

shares hit record highs after


Berkshire Hathaway

disclosed an 11.4% stake in the PC and printer giant – a bet that comes as some of the most influential hardware analysts on the streets have turned cautious about the stock, setting up a classic debate bullish versus bearish on the famous mark.

Asked to comment, HP (ticker: HPQ) said in a statement: “Berkshire Hathaway is one of the most respected investors in the world and we welcome them as an investor in HP Inc.”

The debate boils down to this: bulls see a well-run company that is cheap in statistical terms and that aggressively returns capital to holders. The bears fear that after an unusual period of rising demand for personal computers, growth will slow from here.

In Securities and Exchange Commission filings disclosing the position, Buffett’s company did not provide any particular reasoning for taking the stake in HP. But it’s not hard to see why Berkshire (BRK.A) might find that appealing.

As Barrons repeatedly noted, HP shares are cheap by almost any measure. In an October 2021 column, we described them as a “screaming buy.” Maybe Warren noticed.

Even with Thursday’s 16% stock move, HP is trading for a modest nine times the company’s expected October 2023 fiscal year earnings, and just 0.7 times sales. And the company remains extremely shareholder-friendly.

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Over the past eight quarters, HP has repurchased 26% of its stock, and the company has promised to repurchase at least $4 billion of stock in the current fiscal year. HP pays a strong dividend of 25 cents per quarter, yielding 2.8%.

HP has seen unusually strong growth during the pandemic period as demand for PCs soared as many people turned to working and learning from home. It was a particularly boom time for HP, which is more geared towards consumer PCs than Dell Technologies (DELL).

Meanwhile, HP has expanded its portfolio to include a wider range of peripherals. Last year, the company spent $425 million to buy the HyperX gaming peripherals division of memory products company Kingston Technology. A leader in gaming headsets for PC and game consoles, HyperX also sells keyboards, mice, mouse pads, USB microphones and other accessories. And just last week, HP agreed to buy headset and audio conferencing hardware company Poly (POLY) for $3.3 billion.

As it happens. Barrons also called Poly a cheap stock last year. The deal is offered at a relatively modest valuation of around twice expected forward sales. HP said it expected the deal to provide an immediate boost to non-GAAP earnings and projected the Poly business would grow 15% annually within three years of the deal closing. ‘deal.

Still, Berkshire’s buy comes just days after analysts at two of Wall Street’s most influential firms sounded cautious about the stock. Last week, Morgan Stanley analyst Erik Woodring cut his rating on HP shares to Underweight from Equal Weight, lowering his price target to $31 from $34. Woodring and other analysts expect PC demand to slow as the pandemic recedes.

“PC and consumer hardware spending will come under pressure as supply improves and demand normalizes after 2 years of above-trend growth,” Woodring wrote in a research note. He believes material budgets in 2022 will be under pressure due to a combination of macroeconomic factors, including rising Covid-19 cases in China, war in Ukraine, inflationary pressures and a potential recession. His worry is that in a downturn, CIOs will prioritize spending on software, services and communications over PCs, data center infrastructure and printing. It predicted a 6% drop in PC shipments in 2022.

Goldman Sachs analyst Rod Hall also cut his rating on HP shares last week to Neutral from Buy, with similar reasoning. “We note that PC demand has already moderated for low-end consumers, and we expect higher end demand to ease by the end of this year,” he said. declared. “These demand trends could be exacerbated on the negative side by increasing pressure on the consumer economy, driven by inflation.” It expects an 11% drop in PC unit sales this year.

Paul Wick, portfolio manager of the Columbia Seligman Technology and Information Fund, meanwhile made bullish comments about HP earlier this week in an interview on Barron’s Live. He thinks analysts are just too bearish.

“We’ve been big fans of Hewlett-Packard and CEO Enrique Lores, who executed extremely well,” he said. “Not only have PCs been strong, but right now we have this return to work, which is driving demand for desktop printers…and desktops and other commercial PCs are growing as well. Their PC business remains stable despite the decline in the consumer market and the printing business is recovering…and the company is buying back 15% of their shares per year.

Wick thinks HP can earn $5 per share in fiscal 2024, and he noted that the number of shares keeps shrinking, quarter after quarter. “It’s not a sexy business, but it’s better than people give it credit for,” he said.

Thanks to Warren Buffett, the market is now giving more credit to HP.

Write to Eric J. Savitz at [email protected]

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