Tracking HP After It Tied The Knot With Buffett’s Berkshire Hathaway

Warren Buffett's Berkshire Hathaway (NYSE: BRK-ABRK-B) revealed in an update on April 7, 2022 that it had taken a major stake in computer and printer maker HP Inc (NYSE: HPQ). Buffett's fund purchased nearly 121 million shares of HP worth US$4.2bn, amounting to an 11.4% holding in HP. HP shares soared some 10% in after-hours trading.

The purchase of HP shares was yet another multi-billion-dollar investment by Berkshire this year. It followed the $11.6bn takeover of insurer Alleghany and acquisition of Occidental Petroleum stock worth more than $7.2bn.

Buffett's investment philosophy

According to Warren Buffett's Letters to Berkshire Shareholders in 2021, the annual percentage change in the per-share market value of the fund was 29.6%, while the annual percentage change in S&P 500 with dividends included was 28.7%. In turn this was 0.9 percentage points higher than the average annual S&P index. Amid some market volatility in 2021, Berkshire still performed better than the index.

In his letter, Buffett also listed the company's ten largest equity holdings; these include Apple (NASDAQ: AAPL), Bank of America Corp (NYSE: BAC), American Express Company (NYSE: AXP), The Coca-Cola Company (NYSE: KO), Moody's Corporation (NYSE: MCO), Verizon Communications Inc. (NYSE: VZ), U.S. Bancorp (NYSE: USB), BYD Co. Ltd. (01211. HK), Chevron Corporation (NYSE: CVX) and the Bank of New York Mellon Corp (NYSE: BK). As of 2021, Berkshire held approximately 900 million Apple shares, valued at $161bn, amounting to 5.6% of Apple. In 2021, Berkshire raked in hundreds of billions of dollars from Apple.




One of Buffett's investment philosophies is to pay attention to the intrinsic value of a company. Buffett's gains from long positions in the past were closely associated with that investment doctrine, and once again, it's this philosophy that has opened Berkshire pursue when buying into HP.

Rising after splitting

Once the world's largest maker of personal laptops, Hewlett-Packard, or HP, split into two separate publicly traded companies, Hewlett-Packard Company (HPQ) and Hewlett Packard Enterprise (HPE), on November 1, 2015. HP's main businesses spread over personal computers and printers, while HPE operates cloud computing, services, software and infrastructure businesses.

When deciding to split, the then-CEO of HP, Meg Whitman, suggested that the separation of the company was a rational practice that could better help HP to retrieve ground lost to its competitors. She hoped that the two new independent companies could optimize strengths in their targeted markets in a bid to improve the brand's performance.

HPE continued to reduce the size of investment portfolios since its spin-off and closed or sold parts of its businesses. This has impacted revenue. In 2021, total revenue was $27.8bn, representing a slight increase of 2.97% year-on-year, but massively down on $50.1bn in 2016.

However, the company breakup has seen HP improve its revenue growth and profitability in the PC business. In 2021, HP reported revenue of $63.5bn, up 12.1% from the previous year. The record-high revenues were primarily driven by the impressive growth in the PC business, in which revenue from consumer PC grew by 19.9% while net income from laptops increased by 18.5%. HP's impressive performance in 2021 was driven by strong demand for computers. In turn this demand was driven by the move to working from home, remote learning, and gaming as a result of the Covid-19 pandemic. The firm also reported a rising market penetration rate in 2021.

The growth in revenues also lifted HP's net profit for 2021, which increased by 128.7% year-on-year to $6.5bn. Moreover, its profitability improved, with the overall gross margin rising to 21%.

Despite the stellar performance of the PC business, HP's other breadwinner, the printer business, faltered amid the an increasingly saturated market. But HP was still positive on the outlook in its 2021 annual report, predicting continued growth in demand for computer and printer products.



(Source: Company Announcement)

In terms of share price, HP held up well all along throughout the pandemic. Its share price stopped declining in the first half of 2021 and started an upward trend. In the first quarter of 2021, its share price gave back much of the gains but has since recovered. Experts predicts that the share price may increase further as Covid-19 subsides.  

As of April 7, HP shares only traded on a forward P/E ratio of just 9.22, according to Yahoo Finance. That was well below the forward P/E ratio on the S&P 500 of about 18.2. It was also considerably lower than the 26.81 of rival Apple. For the printer business, it was still cheaper than Xerox's forward ratio P/E of 12.


(Source: Wind)

HP is still one of the largest computer makers in the world, and its position in this space should improve due to a combination of its extensive experience and intensive investment. It largely benefited from the outbreak of the pandemic, which engendered somewhat of a renaissance in 2021. Buffett's purchase of HP shares may be likely to further enhance the company's share price going forward, reinforced by his investment philosophy that focuses on the intrinsic value of a company and waits for a good return.

Disclaimer: This article is informational only. This article is prepared by Mentor Finance (the "Company") and by certain qualified investors (such as professional investors). By reading ...

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