2 Rock-Solid Cheap Tech Stocks With a P/E Nearly Half the Industry Average
As strong as the industry has performed this year, several stocks remain incredibly cheap. And two, HP Inc (NYSE: HPQ) and Cisco Systems, Inc. (NASDAQ: CSCO), in addition to their relative value, also pay handsome dividends.
Cisco's transformation is why many investors have shunned its stock. In the case of HP, it may be surprising given its low price-to-earnings (P/E) ratio that its stock performance has been nothing short of spectacular this year. So why is it still so cheap? The good news for value seekers is that HP and Cisco are bargains for all the wrong reasons.
There is no "problem" with HP
A question surrounding HP, and why it's trading at nearly one-half its industry P/E average -- 14.1 versus 22.3 -- is the persistent concern its core revenue driver, PCs, is a dying industry with no chance of revival. There are two problems with that line of reasoning.
One, there are a growing number of pundits -- myself included -- who think the PC market is bottoming out and will begin to stabilize before long. Second, while the global market did decline in the second quarter by 4.3%, HP bucked the trend again by increasing shipments 3.3%, making it the leading PC provider on the planet.
Another arrow in HP's quiver is the job CEO Dion Weisler has done turning around the once-flailing printer unit. For some perspective, a year ago printing sales were down 14% compared to 2015, including an 18% drop in supplies revenue. But new products and targeting niche markets has HP's printing division back in business.
In 2017's fiscal third quarter, HP's printing unit revenue climbed 6% to $4.7 billion, including a 10% increase in supplies sales to $3.1 billion. Add in HP's 10% jump in personal systems revenue -- home to its PCs, notebooks, desktops, and workstations -- to $8.4 billion, and the $13 billion in total revenue was an impressive 10% rise year over year.
Beyond its low P/E relative to its peers, HP's 2.75% dividend yield is nearly twice its industry average of 1.6%. When it comes to value, income, and growth potential, HP is a cheap stock worth a look.
Patience has its rewards
Though Cisco's stock is up 8% this year, the muted share price gains and meager P/E ratio of 17 compared to its peer average of 33 are largely due to Cisco's declining total revenue, which investors saw again last quarter. The $12.1 billion in sales in the recently announced fiscal fourth quarter was a 4% drop. Bad news, right?
There's a bit more to the Cisco story than its top line, however. CEO Chuck Robbins has instituted a couple of key initiatives, both of which are coming along nicely. One objective is to become a more efficiently run company by managing overhead during its transformation.
Cisco ended its fiscal year by reducing operating expenses 3.4% to $4.5 billion, including a 5% drop in sales and marketing-related costs -- a particular focus of Robbins. There was very little change for the year, but that simply shows Cisco's cost management strategy is new and gaining traction, so investors can expect more of the same going forward.
The other goal is to shift from Cisco's over-reliance on legacy switches and routers, both of which declined 9% last quarter, and focus on software and subscription sales to drive recurring revenue. Of Cisco's quarterly revenue, 31% -- equal to $3.72 billion -- was recurring, up from 27% a year ago.
Cisco's deferred revenue climbed 12% to $18.5 billion to end its fiscal year thanks to a 23% rise in subscription and software offerings. Cisco's dividend yield of 3.4% is well above the 2.3% average in its field, which should help patient investors looking for solid, cheap tech stocks wait as its transition continues.
10 stocks we like better than HPWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and HP wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of September 5, 2017
Tim Brugger has no position in any of the stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.