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Investment guru Warren Buffett recently bought an 11.4% stake hp (NYSE:HPQ) for its holding company, Berkshire Hathaway. The purchase now makes him HP’s largest shareholder. To be clear, Hewlett-Packard split its business into two divisions in 2015. Hewlett PackardEnterprise would sell servers and business services while HP Inc would sell PCs and printers. Warren Buffett chose to buy stakes in the latter. On the day its purchase was announced, HP’s stock price rose 15%. Despite this, it has since come back at a cheaper price. Given Warren Buffett’s impeccable track record of beating the market, I’ll look at HP’s fundamentals and prospects to determine whether to buy HP stock for my portfolio.
Warren Buffett has always preached his most important investment philosophy. He recommends only buying stocks in companies that have solid balance sheets, quality earnings, and strong pricing power. That’s why I was surprised to see his holding company acquire $4 billion worth of HP stock.
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HP’s balance sheet is certainly not in a healthy position. With a debt ratio of -304.4%, the technology company has negative equity. This means that the company’s liabilities exceed its assets. Its cash and equivalents are also insufficient to cover its debt, with just $3.4 billion in cash and $7.1 billion in debt. As a result, I’m scratching my head as HP’s balance sheet doesn’t align with Warren Buffett’s fundamental investment strategy.
Nonetheless, the silver lining in HP’s dismal record is that it manages to generate quality profits. Since the first quarter of 2021, HP has managed to grow its revenue and profit margins. The company rose to 10.1% from a profit margin of 5.6% in the most recent quarter. In addition, HP has announced its intention to further expand its business. Just last month, HP announced the acquisition of poly, a voice and video solutions company. This should bolster HP’s growth strategy as the company aims to build a leading portfolio of hybrid work solutions.
More importantly, HP trades at a low price-to-earnings multiple of six while paying a decent dividend of $0.25 per share. Perhaps for these reasons, Warren Buffett decided to invest in one of the world’s largest PC makers, as he expects HP to continue generating increasing amounts of free cash flow.
Unfortunately, that’s all the good news I have for HP. Despite the company’s positives, there are worrying trends the PC giant is facing. For one, market analysts are predicting that PC growth will slow significantly as inflation continues to eat away at consumer incomes. It doesn’t help when either UBS HP announces a downgrade of shares citing weaker demand for HP products, with Wall Street expecting the same S&P500 company recorded a 12.4% drop in profits. In addition, HP is not the market leader as it lags behind its rival, Lenovogiving it less pricing power.
So, despite HP’s value proposition, I don’t think the stock will do particularly well for the foreseeable future. The company’s balance sheet also leaves a lot to be desired, which is why I won’t be buying any HP shares for my portfolio in the foreseeable future.
https://www.fool.co.uk/2022/04/14/warren-buffett-just-bought-hp-shares-should-i-buy/ Warren Buffett just bought HP stock. Should I buy?