Warren Buffett
Berkshire Hathaway’s 11.4% HP stake is a stereotypically yawn-worthy position … and thus a classic Buffett value betWarren Buffett dipped into Berkshire Hathaway’s (BRK.B, $344.71) massive cash pile for the third time in the past month, initiating a commanding position in HP (HPQ, $34.91).
And while some of the stocks Berkshire has been buying and selling recently might leave folks scratching their heads, this big new bet on a PC and printer maker looks very much like a classic Buffett value play.
Berkshire late Wednesday disclosed a stake of 121 million shares in HP, worth $4.2 billion as of that day’s closing price. HPQ stock predictably popped on the news, adding as much as 18% at one point soon after Thursday’s opening bell.
Fair enough. There’s nothing quite like a major vote of confidence from the world’s greatest long-term investor. With 11.4% of HP’s shares outstanding, Berkshire Hathaway is now the company’s largest stockholder, and by a good margin.
Asset management giant Vanguard, which specializes in passive investment products and therefore must own loads of stocks by default, comes in second with 10.6%, or 111.5 million shares.
Suffice to say Buffett made a statement with this move.
Warren Buffett’s Shopping Spree Continues With HPBerkshire’s chairman and CEO has for years bemoaned the fact that rising asset prices have made it tough to find attractive acquisition targets or bargain stocks. The S&P 500 generated a total return of nearly 29% last year, and yet Buffett’s holding company was a net seller of equities in all four quarters of 2021.
The result is that Berkshire’s cash hoard has nearly doubled over the past five years. The company ended 2021 with $146.7 billion in cash, equivalents and short-term investments. In 2016, that figure stood at $74.9 billion.
But the market’s rough start to 2022 has apparently changed Buffett’s calculus – and prompted him to go shopping.
In early March, Berkshire disclosed a series of investments in Occidental Petroleum (OXY). BRK.B is now the oil and gas firm’s largest shareholder, with 14.6% of OXY’s shares outstanding. A couple of weeks later, Berkshire struck a deal to acquire insurer Alleghany (Y) for $11.6 billion.
The HPQ investment isn’t in the same league as those other deployments of cash. But it does have the kind of attributes Buffett has exploited for long-term outperformance many times in the past.
Why Buffett Scooped Up HPQBuffett’s Berkshire Hathaway portfolio comprises scores of stocks, but it’s actually a highly concentrated one. Apple (AAPL) alone accounts for nearly 48% of the portfolio’s total value. Indeed, the top four holdings – AAPL, Bank of America (BAC), American Express (AXP) and Coca-Cola (KO) – come to nearly 78% of Berkshire’s equity holdings.
Then there’s HPQ. At just 1.2% of Berkshire’s portfolio, the position, while material, isn’t going to make too much of an immediate impact.
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Let compounding do its magic, however, 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.
“We think HPQ is on pace to generate annual FCF of at least $4.5 billion, with all being returned to shareholders,” writes CFRA Research analyst Angelo Zino, who rates shares at Hold.
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 in the quarterly disbursement to 25 cents per share.
Not Exactly a High Growth Play …True, the market for PCs and printers is hardly overflowing with growth prospects. But HPQ has a solid track record of slow but steady gains on the top line. Wall Street analysts see this incremental revenue growth continuing for years, all helped by recent strategic acquisitions.
The latest such deal came in March when HP agreed to acquire Poly – which combines the old Plantronics and Polycom – for $3.3 billion. The deal bolsters HPQ’s offerings in headsets and cameras, as well as the video conferencing and collaboration software that goes with such gear. It’s essentially a bet on permanent changes to work in the post-pandemic era.
“HP and Poly expect to deliver a complete ecosystem of devices, software and digital services to create premium workplace experiences and productivity enhancements in the age of hybrid and work-from-anywhere,” writes Argus Research analyst Jim Kelleher (Buy). “In this new normal, HPQ appears well positioned with its strong personal system (PC) and printing franchises.”
… But Solid Margins, Cheap StockIn addition to synergistic acquisitions and slow-but-steady revenue growth, HPQ is reliably profitable. Buffett can pretty much count on the company delivering 20% gross margins and 10% operating margins.
And then there’s HPQ’s valuation, which Buffett appears to have found irresistible. Before shares jumped on the Berkshire news, HPQ traded at just 8.1 times analysts’ 2022 earnings per share (EPS) estimate. That’s despite the Street’s forecast for average annual EPS growth of 27% over the next three to five years.
Heck, according to data from Refinitiv Stock Reports Plus, HPQ stock was trading at a discount of 16.5% to its own five-year average on an expected earnings basis.
In a word, it was cheap.
Lastly, Buffett famously places a premium on experienced management. CEO Enrique Lores, who has served the company in a myriad of roles for three decades, appears to ably check that box.
The Bottom LineBuffett snatched up a boring but dependable cash machine at a bargain price.
Retail investors tempted to copy the move might want to wait for a pullback, however. Price is what you pay; value is what you get, as Buffett likes to say. Sure, HPQ could still be a bargain at current levels, but it’s sure not the same bargain that Berkshire just caught.