Recently, the flagship of "Stock God" Buffett, Berkshire (BRK.US), announced that since the beginning of April, hp (HPQ.US, a supplier of personal computers and printers, has been increasing.
According to the documents released by Berkshire, from April 4 to April 6, 2022, a total of 11.134 million shares of HP have been bought, with an average price of between $34.88 and $36.43.
Whalewisdom data shows that Apple (AAPL.US) remains Buffett's favorite, holding $157.5 billion, equivalent to 5.44% of Apple's issued shares (As of December 31, 2021 data), accounting for 46.28% of Berkshire's holdings.
Just after entering Berkshire, HP's portfolio has become the 11th largest holding, behind energy stocks Chevron (OVX.US) and OXY.US, with 121 million shares worth $4.222 billion, compared with 1.24% of Berkshire's U.S. stock portfolio.
However, compared to HEWLP, which is only $42.2 billion, Berkshire's holdings are equivalent to 11.4825% of its issued shares. As a result, hp's share price surged 14.75 percent to $40.06 after the announcement. In other words, in one day, the stock god made $623 million.
When Apple entered the Berkshire portfolio in the first quarter of 2016, the average price was only $37.32, which was a huge difference from the current $172.14. So is it possible for HP to be the next Apple? Let's analyze the reasons why Berkshire may be interested in HP one by one.
Profitability outperforms peers
HP is the world's leading provider of PC and peripherals, image and printing products, as well as related technologies, solutions, and services for consumers, small and medium-sized enterprises, and large enterprises, including public utility, health, and educational institutions.
The company has three reporting divisions: Personal Systems, Printing, and Enterprise Investments.
The Personal Systems Segment provides PCs, workstations, customer terminals, business mobile devices, POS (point of sale) systems, displays and peripherals, software, support and services, etc., and competitors include Lenovo, Dell, Huawei, Acer, ASUS, Apple, Toshiba, Microsoft and Samsung.
The Printing Segment provides printer hardware, consumables and solutions for consumer and commercial use, with competitors including Canon, Lexmark International, Xerox, Seiko Epson, Ricoh and Brother Industries, Inc.
Corporate investments include HP Labs and specific business incubations and investment projects.
For the 12 months ended January 31, 2022, HP's personal systems revenue increased 13.21% year-over-year to $44,952 million, or 69.29% of total revenue, while printer revenue increased 10.88% year-on-year to $19,915 million, or 30.70% of total revenue.
Relatively speaking, the operating margin of the printer business is better than that of the personal system, which is 7.34% for the 12 months ended January 2022, and 17.66% for the latter.
HP mainly uses outsourced production, that is to say, it does not produce itself, and it is handed over to external manufacturers for production, which is also the current business model of many office equipment and personal computer brands.
In the personal systems business, HP's operating margin is better than Dell's (DELL.US) 4.60%, so after joining the higher-margin printer business, HP's overall operating margin reached 8.23%.
As can be seen from the table below, HP's R&D investment is slightly higher than Dell's, but its marketing and administrative efficiency is better than Dell's, which is why its operating margin is more ideal.
As far as printers are concerned, Canon (CAJ.US) has an operating margin of 8.02% for the 12 months ended 2021, far lower than hp's printer business operating margin of 17.66%, as can be seen from the following table data, Canon's marketing and administrative investment is huge, accounting for 30.13% of total revenue, and the proportion of research and development has reached 8.18%, which is much higher than HP's overall investment, which is the reason for its low profitability.
From the data comparison, whether it is Dell, a competitor to the personal computer, or the printer business competitor Canon, HP's profitability is even superior.
And the valuation is relatively low compared to its peers, see the table below, although HP's profitability is more competitive, but the price-to-earnings ratio valuation is lower than Dell and Canon.
The asset-light business model makes HP more flexible
HP primarily outsources the production of products it designs to save time and provide better cost efficiency, and the company is able to ensure supply chain flexibility through multiple outsourcers.
The advantage of this approach is asset-light operation, HP does not need to purchase expensive, resource-intensive assets such as factory equipment, and does not need to hire a large number of workers to ensure a smooth production process, which saves a lot of operating expenses and capital expenditures.
And it can transfer inventory pressure to suppliers through the JIT (Just In Time) model, reducing the corresponding operating costs and potential risks, and also freeing up huge liquidity (which will be mentioned below).
As of January 31, 2022, HP's total assets were only $38.912 billion, but it could generate revenue of $64.868 billion, which means that for every $1 in assets invested, it can generate $1.67 a year.
Among its assets, the total asset value of property and equipment is only US$2.619 billion, which is lower than cash and cash equivalents, equivalent to 6.73% of total assets, while its cash and cash equivalents account for 8.72%. Cash assets can generate interest income, while loss-type assets such as properties and equipment generally only incur maintenance costs, which is the difference between heavy assets and light assets.
Borrow liquidity from suppliers or creditors
As mentioned earlier, the outsourcing model has freed HP from the hassle of holding large amounts of inventory.
As of the end of October 2021, HP's inventory turnover period is 53 days and the receivables turnover period is 30 days, that is, an average of 53 days to sell products and 30 days to receive payment, for a total of 83 days.
However, HP obviously has a strong bargaining power for suppliers, and the turnover period of accounts payable reaches 108 days, that is to say, HP has a 108-day payment grace period, and after receiving the payment for the goods, it can also be deferred for an additional 25 days before paying the supplier, which undoubtedly provides it with an additional 25 days of capital use period and has greater flexibility in capital transfer.
The sheer size of its accounts payable is the reason for its high debt, so HP's shareholder attributable equity is negative, but this is not because of its financial position, but simply because it has a long payment period, which means that HP has the ability to use the extended payment terms provided by suppliers/creditors to gain financial flexibility to return to shareholders , even though its shareholder attributable rights are negative.
The buyback is even stronger than Apple's
Industrial and financial advantages freed UP HP to give back to shareholders.
For fiscal 2021 ended October, HP returned $7.2 billion to shareholders, equivalent to 17.1 percent of its current market capitalization of $42.2 billion, including $6.3 billion in share repurchases and $900 million in cash dividends. As of October 31, 2021, HP had another $6.4 billion in repurchase authorizations, and the company said it would continue to repurchase at least $4 billion in fiscal year 2022, which is equivalent to 10% of its current market capitalization.
HP has been sparing no effort in dividends and share buybacks, as shown in the table below.
Perhaps, this is an important reason why Berkshire, which is good at calculating the return on investment, chose HP.
In contrast, as of September 25, 2021, Apple repurchased $85.971 billion in shares and paid $14.467 billion in dividends, totaling $100.438 billion, equivalent to 3.58% of its current market capitalization.
On December 25, 2021, Apple authorized a $315 billion common stock repurchase program, and by December 25, 2021, it had used $274.5 billion, equivalent to 9.77% of its current market value of $2,809.2 billion.
In other words, if Apple completes the repurchase program and cancels its shares, the equity of its existing shareholders may increase by 9.77%. The same principle is true for HP, dividends plus repurchases (assuming write-offs), HP can bring more than 17% of shareholders to the interest upgrade.
Of course, from the perspective of innovation and profitability, HP is far from Apple, and in terms of the replacement needs of personal system products and printers, it may not be as clean as the demand drive brought about by the rapid iteration of Apple products. However, HP's advantage is better than a perfect and mature industrial chain, superior bargaining power, which provides confidence for it to give back to shareholders, especially when the Us monetary policy is tightened, the cost of funds increases, and the interest value obtained by HP is more attractive.
Mao Ting