What a brutal six months it’s been for HP. The stock has dropped 34.1% and now trades at $18.63, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in HP, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think HP Will Underperform?
Even with the cheaper entry price, we're cautious about HP. Here are three reasons there are better opportunities than HPQ and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, HP struggled to consistently increase demand as its $56.23 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
HP’s EPS grew at 4.7% compounded annual growth rate over the last five years. On the bright side, this performance was better than its flat revenue and tells us management responded to softer demand by adapting its cost structure.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, HP’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of HP, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 6.7× forward P/E (or $18.63 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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