- The PC and printer part of Hewlett-Packard is still making money.
- It now sells at a Price/Earnings ratio of 5, with a yield of almost 4%.
- If it can keep earning while sales seek a bottom it is a bargain.
Every viable company whose stock falls hard will finally see it reach a point where there are buyers who are convinced they are getting a bargain.
HP INC (NYSE:HPQ) may have finally reached that point.
The folks at Vetr certainly think so. The analyst firm put a “strong buy” on the printer and PC part of the company, the part not led by Meg Whitman, even as top executives were selling big stakes in the company. Their sales helped take another 13% off the company’s market cap, which now stands at $22.7 billion.
The problem, bearish analysts said, was the printer business. But was it really?
Not according to the earnings release.
The company reported sales for the year came in at $103.4 billion, down 7% for the year but only 2% when the impact of the strong dollar is taken out. GAAP earnings came in at $2.48, and cash flow from operations was $6.5 billion. Fourth quarter earnings actually came in at $1.3 billion, 73 cents per share, the same as last year.
Despite these numbers, the stock plunged because sales were down significantly. PCs were down 14%, although they still had an operating margin of 3.8%. Printer sales were down 14% although they have a margin of 17.8%. Software sales were down 7% although they had an operating margin of 30%.
Maybe now you can get the picture. HP is down, but it’s far from out. HP is getting smaller, but it is still generating sales, and profits, at a rate many companies would envy.
At its closing price $12.61 (November 27), HPQ stock had a Price/Earnings multiple of 5.15, in a market where the average company has a P/E close to 15. It sports a yield of 3.92%, which is about twice what the 10-year U.S. Treasury bond is yielding, and last quarter its earnings covered that dividend twice over.
Dion Weisler, who became CEO when Whitman left for the “better” half of the company she cut up, HEWLETT PKD ENT (NYSE:HPE), sounded a note like Gloria Gaynor’s 1970s disco hit, "I Will Survive" telling departing shareholders “We are taking decisive actions that will protect our core business which generates the majority of our cash flows.”
The fact is, Weisler doesn’t have to do much to sustain the Vetr view. If he can keep cutting expenses in line with results shareholders are in for a profitable ride. The remaining HP Inc is not a growth stock. It’s more like a cigarette stock, generating dividends to compensate for the whittling away of markets and assets.
There are investors who like cigarette stocks such as Philip Morris (NYSE:PM), and for this group HPQ is not only a bargain, but one without all the harmful side effects, and one-third the P/E. If what you are looking for is a bargain stock and a return on capital, the new HP is for you.