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When you have a 60-year history of churning out compounded returns of 20% a year, people will tend to take notice when you buy or sell a stock. Warren Buffett is considered the greatest investor of all time for having done that with Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.10%), and dramatically outperforming the S&P 500 by two-to-one over several decades.
Investors often look to the portfolio of the Oracle of Omaha for investment ideas. Earlier this year, he established a position in a tech stock that, while it didn’t match his heavy bets on oil giant Occidental Petroleum made around the same time, is likely to become a long-term core holding for him. It’s one you might be interested in buying now too.
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The personal computer market is not quite the same as it was a decade or more ago, but HP (HPQ -0.74%) is the largest U.S.-based manufacturer and the second-biggest worldwide behind Chinese PC maker Lenovo, with an 18.7% share of the global market.
That market is struggling now, though, suffering its fourth consecutive decline in shipments in the third quarter and the largest drop in the industry’s history. Market analysts at Gartner say worldwide PC shipments plummeted 19.5% from the year-ago period to 68 million units. HP, in fact, had the steepest decline with a 27.5% drop, followed by Acer with a 25.6% decline and Dell at 21.1%.
HP has responded to this market weakness by announcing it will be firing up to 6,000 workers by the end of fiscal 2025, with CEO Enrique Lores telling The Wall Street Journal he’s not expecting improvement anytime soon.
“We think that at this point, it’s prudent not to assume that the market will turn during 2023,” he said.
When Buffett bought HP stock back in April, he knew the PC maker was already experiencing weakness, as first-quarter shipments dropped almost 20% and PC sales fell 6%. However, that was more indicative of HP lapping strong pandemic-era sales. Its commercial PC business remained strong, with revenue jumping 26% year over year.
It was a different story, though, this past quarter — consumer PC revenue dropped 25%, and commercial revenue was off 6%. In addition, both notebooks and desktops, a source of strength beforehand, were down this time.
Shares trading at around $40 when Buffett bought in now go for around $30. So it’s clear Buffett understood an HP investment would not be a high-growth story going forward. So why would he buy it, and why should you consider buying it now as well?
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HP is likely to be a long, steady investment that will incrementally grow revenue over time while bolstering its operations with acquisitions, such as the purchase of Poly it completed in August that brought the maker of video and audio conferencing tools for remote and hybrid workers into the fold.
The $3.3 billion deal should strengthen HP’s operations by creating new opportunities in today’s hybrid working situations. Poly included software, video conferencing, cameras, voice, and peripherals such as headsets, which could be a particular area of future growth.
A report by Frost and Sullivan suggests peripherals are a $110 billion industry growing 9% annually, while workplace solutions are a $120 billion segment growing at 8% annually. The actual numbers are less important than the direction they’re heading in, and they represent an opportunity for HP.
What undoubtedly attracted Buffett most was HP’s ability to generate substantial amounts of free cash flow, or the money left over after paying its bills that it can use to invest in the business.
HP generated $5.8 billion in FCF in 2021, and despite declining PC sales so far this year, it has produced more than $4.8 billion over the last 12 months.
The computer and printer maker uses its cash creation capabilities to support its dividend payments, and has increased the payout every year for the past 14 years. It most recently raised the dividend two weeks ago when it increased the quarterly dividend by about 5% to $0.2625 per share. Berkshire Hathaway owns about 121 million shares of HP stock, which translates into an extra $127 million of yearly income for Buffett.
With solid profit margins across the board, HP looks like a workman-like stock favored by Buffett. Not only can you buy shares cheaper than what Buffett paid, but it’s a stock that could pay dividends for your portfolio for years to come.
Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Hp. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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