HP (HPQ) stock is attracting bottom-feeders as significant buying has come into the stock in the wake of Warren Buffett reducing his position in the stock for the last few months.
HP provided consistent FY24 earnings guidance in addition to increasing its annual dividend by 5% to $1.1024 per share, or a 4.2% yield. Shares of HPQ have fallen by about 20% since the start of August. Investors disapproved of the PC and printer manufacturer’s third consecutive sales miss and weak Q4 (Oct) guidance, which contributed to the Q3 (Jul) earnings results, which were announced in late August.
But today’s initial FY24 adjusted EPS forecast of $3.25-3.65, the midpoint of which still lagged behind consensus, lessens the excessive selling pressure because it translates to a modest year-over-year improvement if HPQ posts Q4 EPS at the midpoint of its quarterly outlook. This is significant because one of the main reasons why investors sold HPQ’s July quarterly results was that the company had trouble delivering on its projections for a stronger second half of the year. Given the FY24 guidance, it might only be a matter of time before the demand environment improves.
HPQ management also described the cost-savings goals it has set for the upcoming years, which are a key driver of its rising EPS year over year. By the end of FY25 (Oct), HPQ anticipates that its “Future Ready” cost-saving initiative will have saved an additional $200 million in annualized gross run-rate structural costs, for a total of $1.6 billion while maintaining charges of about $1 billion. One of the high points of the third quarter was HPQ’s Future Ready plan, which improved the company’s bottom line and allowed it to maintain its margins despite the challenging market environment. HPQ stated that its cost-saving strategy was on track and was assisting in maintaining its long-term growth priorities. This was also evident in the company’s initial free cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More outlook for FY24, which was $3.1-3.6 billion, an increase over FY23.
Warren Buffett, a significant shareholder, has been selling his shares of the company off over the past few months.
After a protracted sell-off, shares are now trading at about 8x forward earnings, a respectable discount to DELL at 10x, making them more appealing from a valuation perspective. Given the near-term challenges HPQ faces, a healthy amount of caution is necessary; however, the company may be carving out a demand bottom in advance of the holiday season.
With an Equal Weight rating on the shares, Morgan Stanley increased its price target for HP from $30 to $31. HP emphasized low-to-mid single digit revenue growth, operating leverage through cost reduction, and high single digit EPS growth through FY26 in its communications. The largest shareholder of HP, Warren Buffett, selling his stake caps valuation in the short term, but the analyst expects the revised price target to rise over the course of the following year.
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