Berkshire Hathaway (BRK.B) - the conglomerate led by legendary value investor Warren Buffett - sold almost 5.5 million shares of HP (HPQ) last week. The announcement took the market by surprise, just as the initial news of Berkshire buying a stake in HP did last year.
Buffett has largely shied away from tech stocks - and while Apple (AAPL) is Berkshire’s biggest holding, the “Oracle of Omaha” considers it a consumer company rather than a tech company.
As for HP, the stock tumbled after Berkshire revealed in its filings that it had sold some shares. So, should you follow suit with Buffett and dump the stock?
HP Stock Falls after Berkshire Trims Stake
It is not unusual for stocks to drop when a major fund sells a stake, just as they tend to rise when a fund announces a new position - thereby affirming their faith in the company. HP, meanwhile, wasn’t a profitable position for Berkshire. The stock lost almost a fifth of its value between April 2022 when Berkshire revealed its position and the announcement of the partial stake sale last week.
While Buffett’s favorite holding period is officially “forever,” he has made quite a few exceptions to this rule. Before HP, Berkshire has sold stakes in tech companies like Oracle (ORCL) and pharma names like Pfizer (PFE), AbbVie (ABBV), Bristol-Myers Squibb (BMY), and Merck (MRK) quite quickly – and while a different investment manager at Berkshire might have made some of these decisions, Buffett himself certainly made the Oracle investment.
Berkshire is still the largest shareholder of HP despite last week's stake sale, but we can be reasonably sure that the conglomerate will continue to sell more shares, in the typical Buffett way. So, with Buffett’s company giving up on HP stock, should you also sell the shares - or is the personal computer (PC) giant a buy instead?
HP Stock Has Underperformed Markets
While we don’t typically associate “underperformance” with Buffett, who has a healthy track record of beating the S&P 500 Index ($SPX) over the long term, HP is among the names in Berkshire’s portfolio that have lagged the markets. After the recent sell-off, HP shares are up just about 4.7% for the year, while the SPX is up 16% over the period.
HP’s underperformance can be explained by both macro and company-specific factors. First, global PC sales have slumped over the last few quarters, and the industry is grappling with the worst slowdowns ever. Also, the printing industry is facing structural headwinds as demand continues to taper down.
The company's fiscal Q3 earnings were also disappointing, as HP missed revenue estimates while providing tepid guidance. Rival Dell (DELL), however, soared over 20% after its most recent earnings release, and had its best day since its 2018 relisting as it posted better-than-expected earnings.
HPQ Forecast
After HP’s earnings release, multiple brokerages - including Barclays, Citigroup, JPMorgan, and Bank of America - lowered the stock’s target price. Its mean target price of $29.05 is now only about 6% higher than the current price levels.
Overall, Wall Street is not too bullish on HPQ, and it has received a consensus rating of Hold from analysts. Of the 11 analysts that cover the shares, only 1 has rated them as a Strong Buy. Two rate it as a Strong Sell, while 1 rates it as a Moderate Buy, and 7 analysts rate the PC giant a Hold.
While Buffett’s views are often at odds with analysts, at least in HP’s case, they seem to be in consensus.
Why HP Stock Might Remain Weak in the Near Term
The PC industry’s slump might continue for some time. In its August report, IDC said that it expects PC sales to fall 13.7% YoY in 2023. Jitesh Ubrani, research manager for IDC Mobility and Consumer Device Trackers said, “Consumer demand for PCs also faces challenges from other devices including smartphones, consoles, tablets, and more, marking 2023 as the year with the greatest annual decline in consumer PC shipments since the category's inception.”
Also, with the global economy continuing to slow and discretionary consumer spending remaining tepid, the near-term outlook for PC stocks does not look very promising.
HPQ Might See Better Days in 2024
That said, HP stock might see better days in 2024 for the following reasons:
- The PC market is expected to recover in 2024, with IDC forecasting a 3.7% YoY increase in shipments. We should start to see replacement demand for PCs bought between 2020 and 2021, which should help drive demand in the coming years.
- The PC industry’s inventory overhang should also get better in the coming quarters, providing support for average selling prices (ASPs) - which have sagged in recent quarters.
- HP is tightening its belt and is optimistic of delivering at least $560 million in structural annualized cost savings by the end of this year, and $1.4 billion by the end of the next fiscal year.
Structural cost savings and an expected rebound in PC sales should help HP’s business next year. Also, artificial intelligence (AI) could be a boon for PC sales in the coming years, as AI-enabled PCs could turbocharge the industry’s growth.
From a valuation perspective, HP stock trades at a next-12-month price-to-earnings multiple of 8.42x, which is below its historical averages. The dividend yield of 3.8% looks attractive, too, for investors looking for high-dividend paying stocks.
All said, I believe that while HP stock is currently out of favor with markets - and even Buffett’s company is giving up after the recent underperformance - the stock should see better days next year.
On the date of publication, Mohit Oberoi had a position in: BRK.B , AAPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
