Over the past six months, HP’s stock price fell to $21.71. Shareholders have lost 14.3% of their capital, which is disappointing considering the S&P 500 has climbed by 10.1%. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy HP, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think HP Will Underperform?
Even with the cheaper entry price, we're cautious about HP. Here are three reasons we avoid HPQ and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
Reviewing a company’s long-term sales performance reveals insights into its 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 $55.3 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 an unimpressive 6.6% 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. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, HP’s margin dropped by 4.1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. HP’s free cash flow margin for the trailing 12 months was 5.1%.
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 7.2× forward P/E (or $21.71 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at one of our top digital advertising picks.
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