Warren Buffett Continues Buying Spree With HP

Summary

• Buffett entered an 11.4% stake in the personal computing and printing company.
• In March, he announced an investment in Occidental and the acquisition of Alleghany.
• HP shares rose on the news.

Billionaire investor Warren Buffett (Trades, Portfolio) revealed his firm established an 11.4% stake in HP Inc. (HPQ, Financial) on Wednesday, the latest in a string of large investments made by Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) this year.

The legendary guru, who leads the Omaha, Nebraska-based insurance conglomerate, along with his two portfolio managers, Ted Weschler and Todd Combs, follows a long-term value investing approach that focuses on companies that have understandable business models, favorable long-term prospects and competent management teams that are available at attractive prices.

According to Form 3 and Form 4 filings with the Securities and Exchange Commission, Buffett invested in nearly 121 million shares of the Palo Alto, California-based company between April 4 and April 6.

Based on HP’s closing price of $34.91 on Wednesday, the stake is worth about $4.2 billion currently. In after-hours trading, its shares popped 9.9% to $38.38 following the announcement.

The personal computing and printing company has a $43.37 billion market cap; its shares were up another 16.6% at $40.71 on Thursday with a price-earnings ratio of 7.35 and a price-sales ratio of 0.74.

The GF Value Line suggests the stock is modestly overvalued currently based on its historical ratios, past financial performance and future earnings projections.

It also ranks highly in regard to its GF Score. The ranking system has been found to be closely correlated to the long-term performances of stocks based on backtesting from 2006 to 2021. With a score of 91 out of 100, HP received strong ranks for profitability, growth and momentum as well as middling ranks for financial strength and GF Value.

HP released its first-quarter 2022 financial results on Feb. 28, posting earnings of $1.10 per share on $17 billion in revenue. Earnings were up 20% from the prior-year quarter while revenue grew 8.8%.

In a statement, President and CEO Enrique Lores praised HP’s “strong top and bottom-line results,” noting the “record revenue” was “driven by strong demand and our leadership in hybrid.”

“Our Q1 performance was particularly strong across our key growth areas that collectively grew double digits including gaming, peripherals, workforce solutions, consumer subscriptions, and industrial graphics and 3D,” he said. “Our performance reflects progress against our strategy to build a stronger HP.”

As part of that initiative, the company announced a month later it is buying Poly (POLY, Financial), a global provider of workplace collaboration solutions formerly known as Plantronics Inc., for $3.3 billion. The deal is expected to close by the end of the year.

GuruFocus rated HP’s financial strength 6 out of 10. Despite having adequate interest coverage, the Altman Z-Score of 2.5 indicates the company is under some pressure. The return on invested capital also eclipses the weighted average cost of capital, meaning value is being created as the company grows.

The company’s profitability fared even better with an 8 out of 10 rating. Although the operating margin is in decline, its returns on assets and capital outperform a majority of competitors. HP is also supported by a high Piotroski F-Score of 8 out of 9, meaning business conditions are healthy, and a predictability rank of one out of five stars. GuruFocus says companies with this rank return, on average, 1.1% annually over a 10-year period.

Other gurus who were invested in HP as of the end of fourth-quarter 2021 included Dodge & Cox, PRIMECAP Management (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Catherine Wood (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Ray Dalio (Trades, Portfolio).

Other recent investments and portfolio

After several years of sitting on Berkshire’s growing cash pile, Buffett has made a number of other sizeable investments recently. In his annual shareholder letter released on Feb. 26, the investor said that “internal opportunities deliver far better returns than acquisitions” and little “excites us” in equity markets.

The guru’s firm first disclosed a 29.8 million-share stake in Occidental Petroleum Corp. (OXY, Financial) in early March, which has since been increased to 136.4 million shares. This was soon followed by the announcement it is acquiring Alleghany Corp. (Y, Financial) for $11.6 billion.

The majority of Berkshire’s $330.95 billion equity portfolio, which was composed of 44 stocks as of the end of the fourth quarter of 2021, was invested in the technology and financial services sectors.

Other companies in the tech sector it held as of Dec. 31, according to 13F filings, were Apple Inc. (AAPL, Financial), VeriSign Inc. (VRSN, Financial), Snowflake Inc. (SNOW, Financial) and StoneCo Ltd. (STNE, Financial).

GuruFocus data shows Buffett’s firm returned 29.6% in 2021, outperforming the S&P 500’s return of 28.7%.

Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com.