HP (NYSE: HPQ) recently posted solid second-quarter numbers, but its stock barely budged as investors fretted over geopolitical headwinds. The PC and printer maker's revenue rose 13% annually to $14 billion, exceeding estimates by $430 million and marking its third straight quarter of double-digit sales growth.
HP's non-GAAP earnings rose 20% to $0.48 per share and matched Wall Street's estimate. Its full-year guidance for 19% to 22% earnings growth also cleared the average estimate of 19% growth. Yet HP's stock only advanced about 2% this year -- indicating that investors aren't really appreciating the tech giant's growth potential. Here are four simple reasons investors should buy HP before the market catches on.
1. It dominates the PC market
The PC market remains a slow-growth one, but HP's PC sales have been outpacing the overall market, fueled by robust sales of its higher-end devices and strong demand in North America. That growth helped HP overtake Lenovo (NASDAQOTH: LNVGY) as the world's top PC maker last year.
HP's Personal Systems (PC) revenue grew 14% annually (11% on a constant-currency basis) to $8.8 billion, with 16% growth in commercial revenues and 10% growth in consumer revenues. Shipments of desktops and notebooks both climbed 7%. The unit had an operating margin of 3.8%, up from 3.6% in the previous quarter and 3.2% a year ago. HP attributed that expansion to lower commodity costs.
HP's global market share in PCs rose from 21.7% to 22.6% between the first quarters of 2017 and 2018, according to IDC, marking its eighth straight quarter of year-over-year growth. Lenovo's share stayed flat at 20.4%.
2. Its printing business is strong
The printing market is also considered a slow-growth one, yet HP's Printing revenues rose 11% annually (9% on a constant-currency basis) to $5.2 billion. Hardware unit shipments climbed 13%, with an 88% jump in commercial units (due to its acquisition of Samsung's printing unit) and 4% growth in consumer hardware units. Its supplies revenue, bolstered by its subscription offerings, climbed 8%.
The Printing division reported an operating margin of 16% for the quarter, which marked an improvement from 15.8% in the previous quarter, but a drop from 17.4% a year earlier due to the integration of Samsung's printing unit, higher raw material costs, and other expenses.
HP is also diversifying the printing business into fresh markets -- including mobile printers, industrial 3D printers, and even next-gen metal printers. Those new products could generate fresh growth for the printing business in the near future.
3. Surging cash flows
HP's strong sales growth and expanding margins help it generate plenty of free cash flow (FCF) for buybacks and dividends. The company expects to generate "at least" $3.7 billion in FCF for the full year -- which would represent a 12% jump from $3.3 billion last year.
HP plans to consistently return 50% to 75% of its FCF to shareholders on an annual basis. That percentage actually topped 100% during the second quarter -- HP generated $937 million in FCF, but it spent $801 million on buybacks and $227 million on dividends.
4. A decent dividend and a low valuation
HP stock currently offers a forward dividend yield of 2.5%, which is higher than the S&P 500's average of 1.9%. The company has already raised that dividend twice after splitting from Hewlett-Packard Enterprise in late 2015.
At $21, HP's stock trades at less than 11 times this year's earnings and just 10 times next year's estimated earnings. It also trades at about 0.6 times this year's revenues. Those are very low multiples for a company with double-digit earnings growth.
By comparison, Lenovo trades at over 100 times this year's earnings and 68 times next year's estimated earnings, thanks to the company's uneven profitability. It also trades at 1.1 times this year's sales -- which makes it a pricier stock with weaker growth.
The key takeaway
I bought shares of HP last October, and the stock hasn't moved much yet. Nonetheless, I believe the market will eventually notice HP's widening lead in PCs, its expanding printing business, its impressive earnings growth, and its low valuations. When that happens, this oft-overlooked stock could surge much higher.
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