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Should You Bet on HP's Post-Earnings Gain?

GuruFocus.com

- By Nicholas Kitonyi

Shares of global computing devices giant HP Inc. (NYSE:HPQ) are up more than 5% since Friday. The Palo Alto, California-based technology company posted its most recent quarterly earnings results, which beat expectations on earnings and revenue.

Should You Bet on HP's Post-Earnings Gain?
Should You Bet on HP's Post-Earnings Gain?


HP has now added more than 50% to its market value since bottoming on March 18, plunging to trade at a new three-year low of $12.54 per share. The company's strong performance was mainly due to an increase in sales and widening profitability margins. HP's management attributed the robust sales for the quarter to Covid-19-related benefits. However, the company also failed to issue guidance for the next quarter, citing uncertainties related to the pandemic.

Highlights from recent quarterly results

For the quarter ended July 31, HP posted adjusted earnings of 49 cents per share, which beat the consensus estimate of 42 cents. The company's top line also outshone analysts' expectations by 2.29%, coming in at $14.29 billion. However, this reflected a decline of about 2% from sales posted for the same period a year ago amid a decline in printer sales.

HP's personal systems segment, which includes personal computer sales, posted a gain of 7% year over year on the back of a boost in PC sales as consumers rushed to prepare for homeschooling and working from home.

Valuation

HP's post-earnings rise captured headlines. However, there is more to this stock than coronavirus-related benefits and challenges. With a current forward dividend yield of 3.55%, the company is one of the best dividend-paying stocks among its peers. For reference, its American counterpart in the computing devices market, Apple Inc. (NASDAQ:AAPL), trades at a forward dividend yield of 2.53%, while Microsoft Corp.'s (NASDAQ:MSFT) equivalent is 0.91%.

Taiwan's AsusTek Computer Inc. (TPE:2357) and Hong Kong-based Lenovo Group Ltd. (HKG:0992) have better dividend yields of 5.67% and 5.37%, respectively. However, HP trades at a highly lucrative price-earnings ratio of 9.17, which easily trumps Lenovo's equivalent of 11.41 and AsusTek's 12.53. On the other hand, Microsft is valued at a price-earnings ratio of 39.23 while Apple trades closer to HP's valuation multiple at 9.88.

Investors should, however, look at HP's balance sheet for precautionary measures. The company currently has more debt on its books than the total sum of its assets, which is depicted by a negative book value per share of $-1.40.

Nonetheless, this only becomes a problem in regard to liquidation, which is unlikely in the foreseeable future given the company's strong fundamentals. HP boasts $3.30 in total cash per share based on the most recent quarterly results and a leveraged free cash flow of $2.73 for the trailing 12 months.

Conclusion

In summary, HP's post-earnings rise could get more investors excited. However, when you dig deeper into the numbers, there are a few red flags to look for. Failure to issue guidance for the next quarter and a highly geared balance sheet could be a concern for some investors. However, the company looks fundamentally strong, which is why it looks more attractive in the long term with a PEG ratio of 0.89.

Disclosure: No positions in stocks mentioned.

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This article first appeared on GuruFocus.