Adi Mukhtar

• Make Paint. Dilute the paint with water at a 1:1 paint to water ratio.
• Wet the Fabric. Wet the fabric in a bowl of water and squeeze it out until it is no longer dripping.
• Paint the fabric with a big paintbrush.
• Press the leaves and flowers.
• Place in the sun.
• Remove leaves.
• Set the paint.

While most technology companies appear over valued at present time, there are a few older technology companies that have been shunned by investors because of their lower growth rates. One such case is HP Inc (NYSE:HPQ), which lacks growth but makes up for it with a very cheap valuation and copious amounts of free cash flow that it is returning to investors via dividends and share buybacks.

The company recently hosted an investor day meeting and we will be using some of the most relevant slides shared during the event to explain why we believe shares are a good buy at current prices, especially when compared to other technology companies.

Even though revenue growth remains low compared to some of the "sexier" technology companies, it has markedly improved the last few quarters.

Source: HP Inc Investor Relations

Earnings per share have been increasing at a lot faster rate thanks to cost optimization efforts and a strong Personal Systems market. Earnings per share have gone from $0.58 non-GAAP EPS in 3Q19 to $1.00 per share in 3Q21, therefore more than 50% growth in only two years.

Source: HP Inc Investor Relations

Historically the printing business has been the most profitable for HP, operating with the "razor & blade" business model where most of the profit comes from selling the ink and subsidizing the equipment. Unfortunately people are printing less than before, and HP has responded by increasing prices on the hardware to rely less on ink profits. It has also launched clever initiatives like the Instant Ink subscription service.

In the last two years revenue for the printing business went down 1.5%, but operating profit increased by 7.5% as the cost optimization strategies HP put in place worked to improve profitability and long-term customer value.

Source: HP Inc Investor Relations

When analyzed by sub-market it is clear that the weakest one is Home printing, which is expected to decline by a couple of percentage points per year. The fastest growing one is Graphics with an expected CAGR of 4.1%. Overall the total printing market is expected to grow by 1% per year from now till 2024.

Source: HP Inc Investor Relations

One area with promising growth for the print business is 3D printing, where HP is targeting industrial, automotive, medical, and consumer customers. In some cases 3D-printed parts can actually be cheaper compared to other manufacturing methods.

Source: HP Inc Investor Relations

We are particularly excited by 3D metal printing which has more industrial and automotive use cases. Below we include a video promoting one of these printers show casing some of the potential uses.

The Personal Systems business has stronger growth prospects compared to the print business. It is expected to grow with a 3.4% CAGR through 2024. Most of the growth is expected to come from Services and Peripherals, with Computing almost flat.

Source: HP Inc Investor Relations

HP is dominating in some of the most attractive Personal System segments such as gaming PCs, and has been adding software offerings such as security and manageability. The work from home, or hybrid office as some prefer to say, has been a boom for laptop and PC sales for HP. Some analyst were predicting the demise of the laptop business as they expected users to migrate to smart phones, but in reality it turned out people appreciate having a laptop for work and gaming.

Source: HP Inc Investor Relations

One of the most attractive characteristics of HP Inc as an investment is the copious amounts of free cash flow it generates. These cash flows are then used to fund the attractive dividend and share repurchases.

Data by YCharts

In fact, in the last five years the number of shares outstanding has decreased from ~1.7 billion to ~1.2 billion, or roughly a third of the shares have been bought back by the company.

Data by YCharts

Despite these generous dividend and buyback policies, the balance sheet remains strong with a very low 1.2x debt to EBITDA, $3.4 billion in gross cash and only $3.7 billion in net debt. This has allowed the company to retain an investment grade credit rating.

Source: HP Inc Investor Relations

Historically, it used to be that the vast majority of profits came from the print division, but that has been changing and now Personal Systems and Print contribute about the same. This is a healthy diversification, especially given that print is facing more growth challenges.

Source: HP Inc Investor Relations

The long-term financial framework given by the company involves high single-digit non-GAAP earnings per share growth, the return to shareholders of more than 100% of the free cash flow (except if attractive opportunities are found for its use), and gross leverage of 1.5x to 2x.

Source: HP Inc Investor Relations

For FY22 the company is guiding to more than $4 non-GAAP EPS, with significant growth contribution from the effect of share buybacks.

Source: HP Inc Investor Relations

HP Inc is considered one of the most sustainable corporations in the world, in fact it is classed #50 in the Corporate Knights' Global 100 most sustainable corporations. It is part of several other prestigious lists giving credit to it ESG efforts.

Source: HP Inc Investor Relations

Shares are cheap when measured by most valuation metrics such as EV/EBITDA and Price/Earnings. We find shares currently attractive at a forward P/E ratio of only ~8x.

Data by YCharts

Looking a little further into the future, analysts expect earnings to increase until FY 2023, and then go down on FY 2024 and 2025. For these two years there are estimates from just one analysts, so less weight should be given to them. In any case, we firmly believe shares are cheap and priced to deliver attractive returns.

Source: Seeking Alpha

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Logistic is the process of sending items, documents and luxuries to the right place at the right time.

Super Bowl LVII (57) will be held on February 12, 2023 at State Farm Stadium in Glendale, Arizona.

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