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Printing Money: Berkshire Hathaway Buys 11% of HP
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Another week, another big move from Warren Buffett.
Berkshire Hathaway’s busy start to 2022 continued with the purchase of 121 million shares of HP (Hewlett-Packard) Inc. That makes Berkshire the largest shareholder of the venerable PC and printer maker and deals another blow to Buffett’s anti-tech reputation.
Of course, we can’t be completely sure that Buffett made this investment himself, but the approximately $4 billion outlay seems a bit rich for either Ted Weschler or Todd Combs. So, for the purposes of this post, I’m going to assume it was the head honcho.
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Let’s start off with some reactions to the HP deal from the financial media and other respected investors that I think sum up the key points pretty well.
Warren Buffett’s Berkshire Hathaway disclosed late on Wednesday that it had purchased a stake in computer and printer maker HP Inc. worth $4.2 billion, the latest sign that the sprawling conglomerate and its billionaire investor are finding value in the U.S. stock market.
The purchase of 121 million HP shares was the third multi-billion dollar investment by Berkshire in roughly a month, following its $11.6 billion takeover of insurer Alleghany and acquisition of Occidental Petroleum stock worth more than $7.5 billion.
The addition of HP stock to Berkshire’s portfolio signals that Buffett is still betting on corporate America and the U.S. economy, even as Russia’s invasion of Ukraine raises the possibility of slower global growth and high inflation.
HP has been humming right along under CEO Enrique Lores as his operational turnaround continues to bear fruit.
The company squashed analyst profit forecasts for its first fiscal quarter (reported in late February), powered by strong sales of commercial computers and printers. HP said commercial computer and printer sales rose 26% and 9% respectively, from the prior year.
An argument could be made that HP’s stock hasn’t been properly valued by investors — hence Buffett enters smelling a dislocation.
HP shares only trade on a forward price-to-earnings multiple of 8.5 … That’s well below the forward PE multiple on the S&P 500 of about 18.2. It’s also bizarrely below the 12x rival Xerox shares fetch, in the face of [lesser] performance than HP throughout the pandemic.
This big new bet on a PC and printer maker looks very much like a classic Buffett value play.
Let compounding work its magic … and HPQ could be a savvy value play for the long haul.
For one thing, HPQ generates a steady and ample stream of free cash flow (FCF) — the cash left after expenses, capital expenditures, and financial commitments have been met — or an average of nearly $4 billion a year over the past five years.
Industry analysts expect that FCF number to increase and — most importantly — to flow into investors’ pockets.
Free cash flow supports dividends, and it’s no secret Buffett adores dividends. HPQ, for its part, has been not only a generous dividend payer, but a dividend grower. The company has increased its payout annually for 13 years. The most recent hike came in November — a 29% increase.
Warren Buffett bought HP. Why? The company controls a quarter of our PC market and has globalized costs of production downward while raising prices moderately. Also, it increases printer ink costs to consumers 5x as much as it pays each year. It’s the GEICO of the home office.
Over a 5-10 year stretch, I suspect that Warren Buffett’s purchase of HP Inc. will look intelligent. Over a 15-20 year stretch, I suspect the record will show that Buffett would have created more wealth by just buying more Apple stock.
Mr. Buffett and his crew are effectively doubling down on tech hardware. It would be hard to blame them, based on their past forays into technology. Previous plays such as a long-term position in IBM and a short-term fling with Oracle — both of which specialize primarily in enterprise software — didn’t pan out. But Berkshire’s bet on Apple that started in early 2016 has paid off handsomely.
Buffett famously avoids macro calls, but how much of his recent activity is at least partially accounted for by revulsion at the cash pile being destroyed at what is likely soon to be a double digit [inflation] rate?
Perhaps both OXY and HPQ can be viewed partly in this way.
Buffett has always been willing to sit on a lot of cash and that hasn’t changed, but the destruction of the real value of that pile has to be a factor in his thinking.
In my (admittedly amateurish) opinion, HP is right in Warren Buffett’s value wheelhouse. The PC/printer maker trades at a very low earnings multiple, but shows decent growth in its core businesses and a relentless focus on returning value to shareholders.
In particular, aggressive stock buybacks have dropped HP’s share count by more than 30% over the last four years. Importantly, though, CEO Enrique Lores has been very clear that these repurchases will only continue as long as the stock is undervalued. That will be music to Buffett’s ears.
Some critics view HP as a dying company, but dying companies usually don’t show this kind of growth. In 2021, HP increased…
Revenue by 12% ($56.6 billion to $63.5 billion)
Net earnings by 43% ($3.2 billion to $4.6 billion)
Earnings per share by 66% ($2.28 to $3.79)
HP also offers strong dividend growth (last year’s 29% increase puts the company more than half way to coveted Dividend Aristocrat status), a low payout ratio, and both a new subscription model and pricing power on printer ink.
Exactly the kind of boring company — and that’s meant as a compliment — that Buffett loves for Berkshire.
This is not a sexy company. But, as the second-largest PC maker and largest supplier of printers in the world, HP throws off gobs of cash and aims almost all of those earnings at its shareholders.
As everyone else scrambles to pour money into the metaverse, Buffett bets on old-school tech like printers. A classic semi-contrarian value play from the Oracle.
So, should we all go out and buy HP now?
While Warren Buffett comfortably sits among the best investors of all time, that doesn’t mean people should blindly follow his lead.
By the time Buffett’s newest investment hits the headlines, the stock has likely already shot up in price. For example, HP opened 12% higher on Thursday morning as others rushed to copy Buffett’s move. A lot of the hidden value in HP was realized in that initial lurch upwards, leaving these new investors with diminished future returns as compared to Buffett’s purchase at the lower price.
You need 100% conviction before investing in a company. And, if you felt that way about HP, you probably already owned the stock. No one knows exactly why Buffett bought HP, how he values the company, when (or if) he ever plans to sell, etc. If you can’t answer those questions for yourself, then you shouldn’t be in the stock. You cannot outsource your conviction to a third party — even if it’s someone as great as Warren Buffett.
Okay, I lied. You can outsource your investing decisions. By purchasing shares of Berkshire Hathaway. If you want Warren Buffett as your personal financial manager, just buy some shares of $BRK.B. (Or $BRK.A for the high rollers.) I don’t think anyone has ever regretted parking money in Berkshire.
Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.