For most of 2021, Berkshire Hathaway has been sitting on a pile of cash ($146.7 billion at the end of 2021), with most of it used for share buybacks. All of a sudden, in 2022, Buffett is on a shopping spree. Firstly with Occidental Petroleum, where Berkshire revealed a 14.6% stake in March. Secondly, purchasing Allegheny in its entirety for $11.6 billion.
Now, in the latest filing with the Securities and Exchange Commission, it has been revealed that Berkshire bought 11.4% or $4.2 billion worth of HP Inc shares. This makes HP inc Berkshire’s second-largest tech position, trailing behind Apple, which it holds over $150 billion in stock. Not surprisingly, Buffett being one of the world’s most respected investors, HP’s stock soared 15%, making it one of the biggest gains for the company since the pandemic began.
Let’s look at what makes HP so appealing to Berkshire Hathaway and whether you should do the same.
Why this deal now?
To begin, Buffett’s investment comes at a time when the PC market is experiencing uncertainty. Sales of laptops and desktop computers have soared as a result of the pandemic, boosting income for companies like HP. Now that the pandemic is nearly over, many analysts predict that this industry will experience a significant slowdown in the following years.
Apart from that, HP inc was not particularly cheap when Berkshire Hathaway purchased it at an average price of $36 per share, compared to its previous year. HP inc was actually 20% less expensive in 2021 when the company cited a shortage of attractive bargains. So, why now?
1) Inflation
The first and most prominent explanation is the changing macro environment. While Buffett has lamented the lack of attractive bargains in 2021, given the continued rise in stock prices, he can no longer afford to wait.
Berkshire Hathaway had $146.7 billion in cash and cash equivalents at the end of 2021. This is roughly double what it has been in the previous five years. An ample amount of cash on hand is generally good as it would allow the company to wait for the right moment to deploy. Unfortunately, inflation is a big concern in 2022 now. The longer they sit on the cash, the more value would erode, possibly prompting Berkshire Hathaway to go into a shopping frenzy.
2) Strong fundamentals
HP Inc. is also no small company. It is a profitable business with consistent cash flow over the years. Net revenue for FY2022 increased by 8.8% over the previous year, above analyst expectations. This comes as the company’s gaming, peripherals, workforce solutions, consumer subscriptions, industrial graphics and 3D have all witnessed significant growth.
Nevertheless, HP isn’t exactly a high-growth stock. When compared to many other technology stocks, its growth rate is low, ranging from a single digit to a low two-digit. Apart from that, its operating margin isn’t particularly great, with 7.8% for personal systems and 18.2% for printing.
So, why did Warren Buffett invest in this stock?
Well, while not as tempting as other stocks, this one is fairly predictable and stable. Apart from that, this stock has a lot more to look forward to.
For starters, HP expects its non-GAAP diluted net EPS to range from $1.02 to $1.08. When compared to the same quarter the previous year, this is higher. In its most recent earnings report, HP also revised its earlier projection of non-GAAP diluted net EPS from $4.07 to $4.27 to a range of $4.18 to $4.38, implying that we can expect a certain degree of growth for HP In 2022.
Second, despite the pandemic boom having subsided, HP has been aggressively expanding its product offers. Last year, HP spent $425 million to acquire HyperX gaming peripherals division from Kingston Technology. HyperX is a leading manufacturer of gaming headphones, as well as keyboards, mice, and microphones. As part of its effort to capitalize on the remote-work culture, HP has also agreed to buy Plantronics Inc (Poly), which makes phone headsets and audio and video equipment, for $3.3 billion last month.
Should HP execute these plans well, this stock indeed has the potential to do well moving forward.
3) Good Value
Last but not least, there is also the matter of valuation. Almost every statistical measure estimates HP stock to be cheap. Despite the stock rise, HP’s share is still trading at a price-to-earnings ratio of 6.87x.
At this ratio, it is very near its lowest valuation in the last 5 years. Not only that, but Dell, a competitor, has a higher P/E of 7.58 while S&P P/E comes in at 21. Making HP a screaming buy for value investors.
HP also pays a 2.6% dividend. Between sitting on a pile of cash that is eroding in value daily compared to a 2.6%, I would surely pick the dividend too.
Lastly, we must also consider HP’s share repurchase program during the last eight quarters. All of these have added significant value to the company’s shareholders.
Conclusion
We will not know the real motivation behind Buffett’s investment in HP Inc. However, the three plausible reasons listed above provide a compelling case for taking action. Buffett has scooped up a boring but dependable cash machine at a bargain price instead of sitting on a pile of cash. Because of the company’s stability, it might be used as a short-term fixed deposit while he waits for a better opportunity. All while collecting a 2.6% dividend.
This news may have sparked your interest in HP, but should you follow? Borrowed conviction does not last, so do not invest merely because a well-known investor has done so.
Before and after Berkshire Hathaway revealed their position, the fundamentals of HP did not change significantly. At the very most, it provided some validation that HP could be a decent investment, but everyone’s circumstances are different. And if you’re interested in HP, wait for a pullback first. While waiting, do some additional research to see if this company fits into your portfolio.
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