HP Inc (HPQ, Financial) has recently seen a daily gain of 2.32%, although it recorded a 3-month loss of -15.66%. With an Earnings Per Share (EPS) of 2.32, HPQ presents a complex financial picture. Is the stock modestly undervalued? This article aims to explore this question by providing a detailed valuation analysis of HPQ.
Company Introduction
HP (formerly Hewlett-Packard) is a leading player in the PC and printing markets. After exiting IT infrastructure in 2015 with the split from Hewlett Packard Enterprise, HP has focused on these markets. The company has a broad and global customer base, with only one-third of sales coming from the U.S. It outsources manufacturing and heavily relies on channel partners for its sales and marketing.
HP's income breakdown is as follows:
Summarizing GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on GuruFocus' valuation method, HP (HPQ, Financial) is estimated to be modestly undervalued. The stock's fair value is derived from historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. Currently, with a price of $26.27 per share, HP stock is estimated to be modestly undervalued.
Considering HP's relative undervaluation, the long-term return of its stock is likely to be higher than its business growth.
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HP's Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. HP has a cash-to-debt ratio of 0.18, which ranks worse than 89.62% of 2360 companies in the Hardware industry. The overall financial strength of HP is 5 out of 10, which indicates that the financial strength of HP is fair.
This is the debt and cash of HP over the past years:
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. HP has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $54.70 billion and Earnings Per Share (EPS) of $2.32. Its operating margin is 7.62%, which ranks better than 67.58% of 2443 companies in the Hardware industry. Overall, the profitability of HP is ranked 8 out of 10, indicating strong profitability.
Growth is one of the most important factors in the valuation of a company. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of HP is 15.9%, which ranks better than 79.74% of 2325 companies in the Hardware industry. The 3-year average EBITDA growth is 32.2%, which ranks better than 78.41% of 1955 companies in the Hardware industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, HP's ROIC was 12.14, while its WACC came in at 9.58.
The historical ROIC vs WACC comparison of HP is shown below:
Conclusion
In conclusion, the stock of HP Inc (HPQ, Financial) is estimated to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 78.41% of 1955 companies in the Hardware industry. To learn more about HP stock, you can check out its 30-Year Financials here.
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