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Why billionaire Warren Buffett took a stake in HP

In many respects, HP (HPQ) has earned the stamp of approval from billionaire investor Warren Buffett.

Buffett's Berkshire Hathaway revealed it owned 121 million shares of HP in a new filing Wednesday evening. The investment — valued at $4.2 billion — gives Berkshire Hathaway a roughly 11.4% stake in HP.

Shares surged 11% in pre-market trading.

"Berkshire Hathaway is one of the world’s most respected investors and we welcome them as an investor in HP Inc," an HP spokesperson told Yahoo Finance via email.

Buffett's investment makes sense for several reasons.

First, HP has been humming right along under CEO Enrique Lores as his operational turnaround continues to bear fruit.

The company squashed analyst profit forecasts for its first fiscal quarter (reported in late February), powered by strong sales of commercial computers and printers. HP said commercial computer and printer sales rose 26% and 9%, respectively, from the prior year.

The strength in commercial computers and printers offset a more muted performance for consumer products. HP said consumer PC sales fell 1%, while consumer printing sales dropped 23%.

HP CEO Enrique Lores (left) chats with Yahoo Finance Live about the company's path forward.
HP CEO Enrique Lores (left) chats with Yahoo Finance Live about the company's path forward. (Brian Sozzi)

Operating profit margins expanded 70 basis points in HP's personal systems segment, but declined 160 basis points in the printing business.

HP — a prolific purchaser of its own stock under Lores — repurchased another $1.8 billion of its stock in the quarter.

The company offered up an upbeat outlook despite ongoing supply-chain constraints and a slowing PC market.

For the second fiscal quarter, HP sees EPS in a range of $1.02 to $1.08. Analysts had estimated $1.02 a share. The company lifted its full year EPS outlook to $4.18 to $4.38 a share from $4.07 to $4.27 previously. Wall Street was modeling for $4.17 a share.

While HP has rolled right along during the pandemic — in part also fueled by aggressive cost management that has bolstered profits — Lores has begun to put his stamp on the company's future through acquisitions.

The company said in late March it would buy workplace collaboration solutions provider Poly for $3.3 billion. That comes on the heels of a 2021 acquisition of gaming peripheral maker HyperX for $425 million.

Despite all of these efforts, an argument could be made that HP's stock hasn't been properly valued by investors — hence Buffett enters smelling a dislocation.

HP shares only trade on a forward price-to-earnings multiple of 8.5 times, according to Yahoo Finance Plus data. That's well below the forward PE multiple on the S&P 500 of about 18.2 times. It's also bizarrely below the 12 times rival Xerox shares fetch, in the face of less stronger performance than HP throughout the pandemic.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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