There are maybe a few reasons behind Warren Buffett's Berkshire Hathaway's BRK-A, BRK-B, and HP Inc. shares despite the industry's recent downturn that has resulted in sales and profit declines.
Berkshire Hathaway has said in a 13-F filing with the SEC that it increased its HP stake by 16%. Berkshire, led by Buffett, now owns 12% of HP's shares. It's one of Berkshire's top 10 holdings. In April 2022, Buffett revealed a 11% stake in HP. HP shares rose about 2% in pre-market trading on Tuesday.
Proponents say HP's capital allocation is favorable to its investment story and may explain Buffett's increasing ownership.
HP is dedicated to one of the biggest share repurchase programs relative to market cap within our coverage, said EvercoreISI analyst Amit Daryanani.
Under then-new CEO Enrique Lores in 2020, HP implemented a whopping $15 billion stock buyback plan. Lores' leadership has led the company through repurchases of about $13 billion of stock through January 31, 2023, supporting its bottom line by reducing shares outstanding and the stock price.
In 2022, HP acquired workplace tech seller Poly for $3.3 billion - further enhancing its position in the hybrid work environment.
For Buffett, it is always a pleasure to see companies expanding their competitive moat.
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.
Sales of HP's printers 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. Income rose 32% year-on-year.
In November 2022, the tech giant announced a new $1.4 billion cost-cutting plan that will see it decrease 4,000 to 6,000 employees by fiscal year 2025. About 12% of HP's workforce are employed outside of the company, the company said in a statement.
HP shares have fallen by more than 20% in the past year.
But in another nod to why the value-focused Buffett likely views the stock favorably, HP shares appear cheap.
Yahoo! reported yesterday that the stock trades on a mere 8.8 times forward price-to-earnings basis. Finance data, a steep discount to the S&P 500's 18.7 times multiple. HP's stock trades on a trailing 12 month price-to-sales ratio of 0.5. For value investors, anything below 1 is frequently viewed as an 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, Chatterjee said.
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