Berkshire buying HP?

Total of 121 million shares reported, worth approx. $4.2 B at today’s closing price.

https://www.dataroma.com/m/rt.php

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April 6 (Reuters) - Berkshire Hathaway Inc (BRKa.N) disclosed on Wednesday that it has purchased nearly 121 million shares of HP Inc (HPQ.N), the latest in a series of large investments by the conglomerate controlled by billionaire Warren Buffett.

The investment gives Berkshire a roughly 11.4% stake in HP, worth about $4.2 billion based on the personal computing and printing company’s closing stock price on Wednesday of $34.91.

https://www.reuters.com/business/buffetts-berkshire-hathaway…

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Maybe this is a bet on wfh demands on more company issued laptop?

This surprised me and I have the same reaction as I had when the IBM position was announced. Being familiar with the industry and HP in particular, I would assume it is more an trade where they will get in and out within a few years ( a la XOM in the past) rather than hold a long term position.

The company has virtually no moat, intense competition, reorganizes frequently and has subpar management - basically a full list of things Buffett avoids these days. I think as a long term stake this would be a disaster of IBMesque proportions. As a trade, it could work out.

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Much more IBM than Apple.

Qualcomm would have been a better pick. Reasonably valued after a big fall recently due to worries about semiconductor fab shortages on top of all the others like Inflation, recession, Russia etc. A long runway of 3G and IOT led growth is anticipated.

Scratching my head on this one. Pure value play rather than a compounder but what’s the catalyst?

The company has virtually no moat, intense competition, reorganizes frequently and has subpar
management - basically a full list of things Buffett avoids these days. I think as a long term stake
this would be a disaster of IBMesque proportions. As a trade, it could work out.

There are some bits of moatiness in the printer business. Or the printer ink business.

It’s oddly big for a mere trading position.
At first blush it’s too big to be one from Todd or Ted (?), but Mr Buffett usually tends to plan on sticking around.
So that would be my baseline expectation.

The low expectations view?
At an entry price of $36, there does seem to be a margin of safety.
The business doesn’t have to soar for things to work out perfectly adequately when you start with a double digit earnings yield.
If the business merely holds its own on a per-share basis and they don’t do any massive foolish
capital allocation it would make a perfectly acceptable cash cow: you’ll generally get the earnings yield as a total return.
Share count dropping at 8%/year, something Mr B tends to like in that class of firm.
And of course, if they do even moderately well, it could be a very profitable position.

One interesting thing: like Coke, their headline profits (if not real profits) will soar if the US dollar weakens because of the huge export share of sales.
Not that I’m predicting US dollar weakness, but it is quite strong at the moment.
Rising headline profits are generally good for market multiples even if it’s just because the yardstick is shrinking.

Jim

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There are some bits of moatiness in the printer business. Or the printer ink business.

I’ve worked there a while back and have kept in touch with proceedings. For the last 15 years, the place has been perpetually restructing, transforming and instituting layoffs and employee sentiment is generally terrible. In the recent past they have split into HPE, DXC and none of the offspring have done well either as businesses or investments.

HP returns
5 years -3.96% pa
10 years 2.11% pa
15 years 5.29% pa

Returns on the offshoots HPE and DXC are in the similar ballpark and reflect the nature of the business I know from the inside.

In the last 10 years a number of value investors ( like Seth Klarman from Baupost) have been diving in and out of the stock as it has occassionally appeared optically cheap but they’ve almost never been rewarded with any gains. Baupost if now completely out I understand.

Maybe Berksire have insights of why a turnaround this time is likely to be more rewarding but I am extremely sceptical.

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I’ve worked there a while back and have kept in touch with proceedings. For the last 15 years, the
place has been perpetually restructing, transforming and instituting layoffs and employee sentiment is generally terrible…
HP returns
5 years -3.96% pa
10 years 2.11% pa
15 years 5.29% pa

I too know a few people who have worked there, and I imagine we’ve all heard many of the same stories. In my case back to the 1980s.
It does seem to be a badly run firm. Even a true optimist would probably say that the dire bungling is merely intermittent.

Though it has been decades since anyone would call HP well managed,
it’s probably worth making a distinction between the stock price returns and the business returns.
Dreadfully run they may be, but they do make a profit, and nobody expects that to be zero any time soon.
Net profit maybe $4.5bn this year, pretty much the same as in 2015. Hey, that’s not nothing.
The share count is down by about 45% in that time, so it looks like progress on a per-share basis.
What’s that old saying? Buy a business any idiot can run, because someday one will.

The key test is whether one thinks the earnings stream will stretch very far into the future.
If so (I have no opinion) there’s a price for almost everything, so what’s a reasonable price to pay for a cash cow?

If the earnings stream has longevity, then the buybacks are likely good capital allocation since the valuation levels are modest.
Yet I agree that it does seem to be more of an adequate business at a very attractive price than a very attractive business at an adequate price.
The investment doesn’t seem to increase the average quality of the businesses we own.

But it will likely increase Berkshire’s look through earnings and dividend income, and that might last. Hey, that’s not nothing.

Jim

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March 31 - Analyst Erik Woodring lowered his rating on Dell to equal weight from overweight and cut HP to underweight from equal weight, noting that data collected over the past couple of months has shown that have resulted in the firm getting “incrementally more cautious” on the IT hardware outlook for the rest of the year.

“We see increasing risk of negative hardware budget revisions, Hardware earnings revisions peaking, and the potential for further multiple compression, which historically has resulted in IT Hardware underperformance,” Woodring wrote in a note to clients.

Woodring also cut his price targets on the stocks, lowering Dell to $60 from $66 and HP to $31 from $34.

The analyst added that PC and consumer hardware spending could be pressured as supply improves and demand starts to normalize after two years of “above-trend growth” as a result of the pandemic and expects PC sales to decline 6% year-over-year, versus a prior outlook of 4% growth.

Dell (DELL) shares fell 7% to $50.51, while HP (HPQ) shares fell almost 7.5% to $36.02 in early trading.

https://seekingalpha.com/news/3819265-dell-hp-downgraded-pri…

Maybe this downgrade, gave Buffett the entry price he was looking for.

For the last 15 years, the place has been perpetually restructing, transforming and instituting layoffs and employee sentiment is generally terrible.

My initial thought is the same as the board. I think that perpetual restructuring and layoffs are extremely harmful to an organization, and often underappreciated. IBM was also a perpetual layoff machine. How do you rally a workforce for a turnaround with constant budget cutting and layoffs? You can’t.

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Maybe this is a bet on wfh demands on more company issued laptop?

====

The low expectations view?
At an entry price of $36, there does seem to be a margin of safety.
The business doesn’t have to soar for things to work out perfectly adequately when you start with a double digit earnings yield.
If the business merely holds its own on a per-share basis and they don’t do any massive foolish
capital allocation it would make a perfectly acceptable cash cow: you’ll generally get the earnings yield as a total return.
Share count dropping at 8%/year, something Mr B tends to like in that class of firm.

I think the WFH idea goes the other way - their earnings have been temporarily boosted by a surge of company issued laptops, and people are (a) starting to go back to the office and (b) already have a new laptop the company bought for them last year, if they need one. The market is right to be skeptical about this continuing; the contrary view would be that revenues and profits will not return all the way back to pre-covid levels.

So a conservative evaluation would ignore last year’s exceptional earnings, and take something like the average of the previous 3 years, which would be $2.4b. At $36/share or a market cap of $44b, the pessimistic view would put them at 18 times old earnings which may be what they return to. But there is a more optimistic view: for instance, HP is projecting a small increase in earnings for the current year, not a return to 2018-2020 levels. The CEO Lores says (maybe a tad optimistically) that employers have to entice workers back to the office with better computers and printers. If they do make their guidance of $4.28 this year, then they really will have a double digit earnings yield, even after the share price jump to just over $38 after hours.

The fact that they are pretty active share repurchasers is certainly reassuring - they don’t seem to be into empire building, just grinding out positive returns for shareholders by buying back shares that until recently were trading at about 10-12 times earnings, and doing that with about 100% of their profit for the last 3 years. If you have to buy a cash cow, you want one that will just produce a lot of milk, not go traipsing around the country looking for adventure.

dtb

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HP returns
5 years -3.96% pa
10 years 2.11% pa
15 years 5.29% pa

Wow, note that there are 2 HPs. Berkshire bought shares of HPQ.

Here are the “cumulative” returns. Dividends are not included

1 year 8%
3 years 76%
5 years 99%
10 years 232%
15 years 84%%

HPQ also gives dividends of 2.5% and the company has bought back a whopping 60% of its shares in last 15 years.

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Just noting that HPQ is currently up 11% or so in premarket.
One would likely pay a premium to coat-tail Buffett.

Wow, note that there are 2 HPs. Berkshire bought shares of HPQ.

Thanks for catching that !

The Old HP is now HPE, DXC and HPQ

The HP ticker I used to look up those numbers is a petroleum drilling company !

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Some comments fro Morningstar analyst Mark cash:

HP’s two main operating business segments are personal systems and printing. The personal systems
business, mainly containing notebooks, desktops, and workstations, was 69% of HP’s revenue in fiscal
2020, and had a 6% adjusted operating margin. The printing business consists of supplies, commercial
hardware, and consumer hardware and had an adjusted operating margin of 14% in fiscal 2020. The
supplies business accounted for 66% of fiscal 2020’s print division revenue, and we believe that HP’s
operating profits will continue to rely on printing supplies.

HP, which will fund the deal (acquire communication peripherals company Poly for $40 per share in cash)
with a mixture of cash and new debt, remains committed to returning at least 100% of free cash flow
in fiscal-year 2022 through at least $4.0 billion in share repurchases and dividends.

Maybe the commitment to returning 100% cash flow is what attracted Buffett.
At the time of Buffett’s purchase IBM too had made commitments on EPS, dividends and buybacks, which they failed to deliver.
Here’s hoping HPQ will do better.

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Comments from CFRA analyst, Angelo Zino:

We forecast free cash flow of at least $4.5
billion in FY 22 and FY 23 after generating $4.2
billion in FY 21. We see aggressive share
repurchases (at least $1 billion per quarter) and
positively view HPQ’s near 3% dividend yield.

Our 12-month target price of $38 is 8.5x our CY
22 EPS estimate of $4.49, below peers and 5-year
historical forward average of 9.5x. While we
think the management team has done a good
job of navigating the uncertainties within both
the PC and Printing, we think low growth
prospects will keep HPQ’s multiple compressed.

Our Hold reflects our view of valuation, potential
margin headwinds, and uncertainty surrounding
HPQ’s fundamentals. We continue to think the
work/learn-from-home theme will have long-
term structural benefits for PCs, but question
what a normalized run rate for HPQ’s business
will look like by the 2H of CY 22/early CY 23.

“it does seem to be a poorly run firm”

from the wayback machine, when HP bought Compaq, Carly Fiorina said, “it was like two sides of a zipper coming together.”

an analyst replied, “more like the slow motion head on collision of two garbage trucks.”

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In my opinion, this purchase is more about valuation and repurchase activity. Repurchase activity seems to be a MAIN Buffett criteria.

He bought all his OXY when the company signaled they were going to start repurchasing again.

HPQ has been a fairly consistent company, very little cap ex, stable cash flows, low valuation PE below 10, and bought back about 20% of the market cap in the last twelve months.

Nothing to do with ink

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The Old HP is now HPE, DXC and HPQ

HPE spin-off from HPQ happened in 2015, and DXC spin off from HPE happened in 2017 and both HPE and DXC had spin-off multiple other companies like Microfocus, public sector business, healthcare business etc.

HP ticker is for HELMERICH & PAYNE, I thought for a moment that WEB is continuing to buy more energy companies. Afterwards realized berky bought a stake in HPQ.

HPQ is a cash flow machine, they can do $2 per share on a steady state and pay $1 in dividend and $1 for buyback. It is still a $50 B + revenue run rate company.

I looked multiple times in the recent past and I passed it because I was afraid their printer business may fall off the cliff. I assume WEB has better insights than me.

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