HP boasts market-leading portfolios in both the PC and print categories. Management is confident that the company is well-positioned to drive profitable growth in its core markets while capitalizing on significant opportunities in key growth areas. Additionally, HP is leveraging its world-class operational capabilities to achieve its targets and reduce structural costs. The company’s shareholder-friendly capital return strategy further enhances its appeal. In this analysis, I will explore whether now is the right time to invest in HP.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of HP. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of HP's direct competitors either. Thus, I have no personal stake in HP. If you want to purchase shares or fractional shares of HP, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.
The Business
HP Inc. is a multinational information technology company that was formed in 2015 following the split of Hewlett-Packard into two entities. HP Inc. focuses on personal computing and printing and is headquartered in California. Operating in over 185 countries, the company is a global leader in its core markets. It is organized into three reportable segments: Personal Systems, Printing, and Corporate Investments, although the latter contributes less than 0,01% of revenue. The Personal Systems segment, accounting for 68% of revenue, offers a broad range of products, including desktops, notebooks, workstations, hybrid systems, retail point-of-sale systems, and accessories. This segment caters to both commercial and consumer markets. The commercial division includes high-performance devices designed for enterprises, SMBs, and public sector clients, alongside lifecycle management and secure solutions. The consumer division focuses on devices tailored for gaming, remote work, and entertainment. The Printing segment generates 32% of revenue and delivers both consumer and commercial solutions. Offerings include office printing solutions, such as secure printers and services for SMBs and large enterprises, as well as home printing solutions optimized for personal and small business use, featuring ink and laser technologies. The segment also provides graphics solutions for industrial applications like packaging and 3D printing and personalization, which focuses on advanced additive manufacturing solutions. This segment boasts higher margins than Personal Systems, with a significant portion of revenue coming from recurring streams such as ink and toner supplies. The Corporate Investments segment focuses on incubation projects and strategic investments but plays a minimal role in the company’s overall revenue. HP Inc. benefits from a moat, driven by its iconic brand reputation for reliability, quality, and innovation. As one of the oldest and most recognized names in the tech industry, HP attracts and retains a loyal customer base. Its global leadership in PCs and printing provides the company with significant scale advantages and strong market influence.
Management
Enrique Lores is the CEO of HP Inc. He began his career at HP as an engineering intern in 1989 and progressed through various leadership roles before becoming CEO in November 2019. He holds a bachelor's degree in electrical engineering from the Polytechnic University of Valencia and an MBA from Esade Business School. Enrique Lores also serves on the Board of Directors for PayPal. Enrique Lores was a key architect of the 2015 separation of Hewlett-Packard Company, one of the most complex corporate splits in business history. His leadership was instrumental in transforming HP's cost structure, simplifying the organization, and enabling greater investment in innovation to drive profitable growth. As CEO, Enrique Lores has focused on positioning HP for the future by building a more growth-oriented portfolio, accelerating the company’s digital transformation, and establishing HP as a leader in talent development. Enrique Lores is also known for successfully defending HP against a hostile takeover attempt by Xerox Holdings, led by activist investor Carl Icahn, demonstrating his strong leadership and commitment to shareholder interests. Enrique Lores is unafraid to make bold moves, such as the acquisition of HyperX, a gaming and peripherals company, reflecting his belief in the growth potential of these markets. Under Enrique Lores’ leadership, HP has pursued innovative strategies to capture new opportunities in key growth segments. His efforts have earned him recognition as one of Barron’s Top CEOs in 2022 and an employee approval score of 80/100 on Comparably, placing him in the top 5% of similarly sized companies. I believe Enrique Lores is the right leader for HP Inc. His vast industry experience, strategic vision for growth, willingness to make bold acquisitions, and ability to defend the company from external threats demonstrate his capability. His recognition as a top CEO and strong employee approval further highlight his effectiveness as a leader.
The Numbers
The first metric we will investigate is the return on invested capital (ROIC). I would like to see a 10-year history demonstrating a minimum annual growth of 10%. However, since Hewlett-Packard split its business in 2015, I only have data from fiscal year 2016 onwards. The numbers over these nine years are exceptional. It’s rare to see a company consistently deliver such a high ROIC. HP’s impressive ROIC can largely be attributed to its solid operational discipline and effective resource management, but the primary driver is its aggressive share repurchase program. Since 2016, the company has reduced its shares outstanding by approximately 44%, which has significantly boosted ROIC. This also explains the slight decline in ROIC over the past three years. Even with this recent dip, HP has managed to maintain ROIC above 40%, which remains incredibly impressive. Very few companies deliver ROIC figures at this level.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. These figures may initially appear concerning, as HP has only delivered one year with positive equity since its split. However, I wouldn't place too much emphasis on these numbers. HP has strategically used inexpensive debt to fund its aggressive share repurchase program, a practice that many companies have adopted in recent years. While this approach leads to negative equity on the balance sheet, it does not necessarily reflect poor financial health. Therefore, there isn’t much to conclude from these numbers, as they are more a result of financial strategy than operational performance.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. HP has consistently delivered positive free cash flow since its split in 2015. While free cash flow in the past two years hasn't reached prior highs, it is encouraging that the company managed to increase its free cash flow from fiscal year 2023 to fiscal year 2024. Management's guidance for fiscal year 2025 projects free cash flow between $3.2 billion and $3.6 billion, which is a positive indicator for the company’s financial health and shareholder returns. HP has committed to returning approximately 100% of free cash flow to shareholders through share repurchases and dividends, which explains the significant reduction in shares outstanding since the split. Additionally, HP increased its dividend by 5% at the end of fiscal year 2024, marking the ninth consecutive annual increase, further emphasizing its shareholder-friendly approach. Although the levered free cash flow margin remains below the ten-year average, the increase from fiscal year 2023 to fiscal year 2024 is a promising sign. The free cash flow yield, while at its lowest level since 2020, remains above 10%, suggesting that the stock is trading at an attractive valuation. This is a point that will be revisited later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to assess whether a business has manageable debt that can be repaid within a three-year period. This is calculated by dividing the total long-term debt by earnings. After analyzing HP's financials, I found that the company has 2,98 years' worth of earnings in debt. This figure is below the three-year threshold, indicating that debt is not a concern. In fact, HP has consistently maintained a debt-to-earnings ratio below three years, which is impressive given that the company has actively used debt to repurchase shares. This disciplined approach to leveraging debt demonstrates effective financial management. Additionally, there are no indications that debt will pose a concern in the future.
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Risks
Competition poses a significant risk for HP Inc. due to the dynamic and highly competitive nature of the markets in which it operates. The company's two primary business segments *- Personal Systems and Printing - face substantial challenges from a broad array of competitors, each leveraging factors such as innovation, price, quality, distribution, and brand reputation to capture market share. In the Personal Systems segment, HP competes against major players like Apple, Dell, Lenovo, and Microsoft, as well as rapidly growing regional manufacturers. This segment is characterized by intense price competition and short product life cycles, requiring HP to innovate constantly to stay relevant. Competitors frequently introduce new products and solutions with advanced features, creating continuous pressure on HP to enhance its offerings to maintain or grow its market share. Failure to keep pace with these innovations could result in lost market position and reduced profitability. The Printing segment also faces substantial competition from well-established companies such as Canon, Epson, and Xerox, as well as independent suppliers of non-original supplies, including imitation or remanufactured ink and toner cartridges. These lower-cost alternatives directly undermine HP’s pricing power, particularly in the supplies business, which is a critical driver of profitability for the Printing segment. The rapid pace of technological advancements in both segments intensifies the competitive landscape. HP must invest heavily in research and development to integrate cutting-edge features, such as artificial intelligence, automation, and enhanced security, into its products. This effort not only increases costs but also extends the time required to achieve returns on investment. Additionally, the need to match or exceed competitors' innovations places further strain on resources and increases the risk of losing ground in key markets.
Macroeconomic factors pose significant risks to HP Inc.'s business and financial performance due to its global operations and the sensitivity of its products and services to economic conditions. Economic slowdowns or recessions directly impact consumer and business spending, leading to reduced demand for HP's offerings. Discretionary consumer purchases, such as personal computers and printers, are particularly vulnerable during uncertain economic periods, as are commercial investments in IT hardware - key markets for HP. Inflation and rising commodity costs further exacerbate these challenges by increasing production expenses. If HP is unable to pass these higher costs on to customers, as seen in fiscal year 2024 when elevated commodity prices negatively impacted operating margins, the company's profitability can suffer. In addition, higher interest rates create another layer of pressure by increasing borrowing costs for both HP and its customers, potentially discouraging investments in new technology and hardware. Government-related sales are also susceptible to macroeconomic pressures. Changes in government spending priorities, budget constraints, or delays in U.S. government contracts can reduce demand from government organizations and agencies that rely on HP's products and services. These delays or cuts can lead to unexpected revenue shortfalls, particularly in segments with significant government exposure.
The secular decline in the printing industry poses a significant risk to HP Inc. due to its reliance on the printing segment as a key driver of profitability. The industry is experiencing consistent revenue declines as consumers and businesses increasingly transition from physical print to digital formats. This shift has been accelerated by macro trends such as digitization, remote work, and hybrid work environments, which have significantly reduced the demand for traditional printing products and solutions. For HP, this decline is particularly concerning because the printing segment not only contributes higher profit margins compared to the Personal Systems segment but also generates recurring revenue streams through the sale of consumables like ink and toner. These recurring revenues have historically been a cornerstone of HP’s profitability, making the erosion of print volumes a material concern. S&P Global has identified several structural challenges within the printing industry, including declining print volumes, intensifying price competition, and rising operational costs. These challenges are expected to persist, if not accelerate, as competitors compete for a shrinking pool of client spending while grappling with legacy cost structures. The competitive pressures, coupled with the shift to digital alternatives, have prompted S&P Global to maintain a negative ratings outlook for most companies in the print sector. Given that HP’s printing segment accounts for a significant portion of its profitability, the ongoing structural decline in the industry represents a material risk to the company’s financial performance.
Reasons to invest
HP's Future Ready transformation plan is a compelling reason to consider investing in the company, as it aims to drive operational efficiency, foster innovation, and enhance profitability through a comprehensive, multi-year strategy. The plan is built on three pillars - cost optimization, digital transformation, and portfolio simplification - each strategically designed to strengthen HP's long-term financial and operational performance. The first pillar, cost optimization, has already delivered impressive results. HP surpassed its initial targets within the plan's first year, leading the company to raise its three-year cost reduction goal. Approximately 80% of its $1.6 billion annualized gross run-rate savings have already been achieved, with a year remaining in the program. This accelerated progress underscores HP's disciplined cost management and operational efficiency, which are expected to support higher and more sustainable operating margins moving forward. The second pillar, digital transformation, positions HP to remain competitive in a rapidly evolving technological landscape. By leveraging AI tools to automate processes and enhance operational capabilities, HP has improved supply chain resilience, shortened order-to-delivery times, and reduced customer call resolution times. These advancements not only reduce costs but also enhance the customer experience, a critical factor in retaining and expanding its customer base in increasingly competitive markets. The third pillar, portfolio simplification, focuses on reducing complexity in HP's offerings to increase agility and operational leverage. For example, HP has streamlined its Personal Systems segment by reducing platforms by over one-third, lowering commodity complexity, and improving efficiency. In the Printing segment, the company has optimized its portfolio to concentrate on high-margin and growth-oriented areas while simultaneously achieving additional cost savings. Together, these three pillars demonstrate HP's commitment to transforming its operations and positioning itself for sustained profitability and growth.
AI PCs represent a compelling reason to consider investing in HP Inc., given their potential to reshape the PC market and bolster HP's competitive edge. As a leader in this growing category, HP is well-positioned to benefit from the rising demand for AI-enabled devices, which are poised to drive higher margins, elevate average selling prices, and capture significant market share. AI PCs have already demonstrated strong traction, accounting for over 15% of HP's shipments in the last quarter, solidifying the company's leadership as the top provider of AI PCs within the Windows ecosystem. HP is optimistic about the future of this segment, projecting that AI PCs will represent approximately 25% of its PC unit shipments by fiscal year 2025. Over the longer term, the company anticipates that AI PCs could make up 40% to 60% of its product mix within the next three years. The investment appeal of AI PCs lies in their ability to significantly enhance profitability. These devices incorporate advanced silicon technologies such as NPUs, CPUs, and upgraded memory, allowing HP to charge premium prices while delivering enhanced performance and capabilities. Furthermore, HP’s focus on innovation in AI-driven features and enhanced security solutions positions its AI PCs as differentiated products that meet the needs of enterprise clients, creative professionals, and hybrid workers. With AI PCs driving growth in both revenue and margins, HP is strategically aligned with market trends that emphasize intelligent, high-performance computing. This positions the company to capitalize on a transformative shift in the PC industry.
HP Inc.'s focus on emerging opportunities makes it a compelling investment as the company strategically aligns with evolving market trends and customer demands. HP is concentrating on AI integration, the future of work, premium product offerings, and the rapidly expanding commercial segments, all of which are expected to drive sustained growth and profitability. The company’s commitment to the future of work leverages the rise of AI and flexible work environments. HP is delivering innovative solutions designed to enhance productivity for employers while promoting employee satisfaction. Central to this transformation is HP's newly established Technology and Innovation Organization, which consolidates its software resources into a single, cohesive team. This strategic unification allows HP to develop and deliver cutting-edge AI-powered tools more effectively, including solutions for automation, personalized experiences, and enhanced collaboration. By centralizing its innovation efforts, HP is accelerating its evolution from a hardware-centric business to one that provides integrated experiences, opening new revenue streams across enterprise and consumer markets. HP is also prioritizing growth in commercial segments, which are expanding more rapidly than consumer markets. The total addressable market (TAM) for commercial personal systems is projected to grow three times faster than consumer TAM, creating an outsized growth opportunity for HP. The company is already outperforming the market in commercial PCs, and the upcoming Windows 10 end-of-support deadline in 2025 is expected to trigger a significant PC refresh cycle, further driving demand for HP’s offerings. By focusing on AI-driven innovation, addressing the future of work, and capturing growth in high-potential commercial markets, HP is strategically positioned to drive long-term growth and strengthen its competitive position in the evolving technology landscape.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 2,81, which is from the fiscal year 2024. I have selected a projected future EPS growth rate of 5%. Finbox expects EPS to grow by 5%. Additionally, I have selected a projected future P/E ratio of 10, which is double the growth rate. This decision is based on HPs historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $11,31 We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy HP at a price of $5,66 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 4.101, and capital expenditures were 589. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 412 in our calculations. The tax provision was 504. We have 939 outstanding shares. Hence, the calculation will be as follows: (4.101 – 412 + 504) / 939 x 10 = $44,65 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With HP's free cash flow per share at $3,28 and a growth rate of 5%, if you want to recoup your investment in 8 years, the Payback Time price is $32,89.
Conclusion
I find HP Inc. to be an interesting company with strong management. The company benefits from a solid moat through its brand reputation and has delivered an outstanding ROIC since its split. While free cash flow and the levered free cash flow margin are currently below their historical peaks, it is encouraging that both improved in fiscal year 2024. Competition is a key risk for HP, as it operates in dynamic markets against strong rivals and low-cost alternatives, requiring constant innovation and significant resource investment to maintain profitability. Macroeconomic factors also pose challenges, with slowdowns, inflation, rising costs, and higher interest rates impacting consumer and business spending. Government budget constraints further pressure HP's sales and profitability, particularly in government-related segments. The secular decline in the printing industry presents a significant risk for HP, as reduced demand for traditional printing, driven by digitization and hybrid work trends, threatens its high-margin, recurring revenue segment - a critical source of profitability. HP's Future Ready transformation plan is a strong reason to invest. The plan focuses on cost optimization, digital transformation, and portfolio simplification, driving efficiency, innovation, and long-term profitability. AI PCs also offer a compelling reason to invest, as HP is well-positioned to capitalize on growing demand for AI-enabled devices, driving higher margins, increased average selling prices, and significant market share gains. Additionally, the company's focus on AI integration, the future of work, and high-growth commercial segments, supported by its Technology and Innovation Organization, positions it to capture outsized growth opportunities in expanding commercial markets. However, despite these strengths, my primary concern lies in HP’s reliance on its high-margin, recurring revenue from the printing segment. With the secular decline in printing and uncertainties surrounding what might replace this high-margin revenue, I am hesitant to invest in HP at this time.
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