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HP Inc Stock Is Priced for Low Growth, But Poised for Innovation

HPQ stock - HP Inc Stock Is Priced for Low Growth, But Poised for Innovation

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HP Inc (NYSE:HPQ) met earnings estimates. The Palo Alto, California-based technology giant impressed most on revenue, which beat estimates and saw double-digit growth compared to the same quarter last year. Now the company faces a crossroads as it restructures amid a revival in both PCs and printing. Assuming the company can breathe new life into its old industries, HPQ stock could be poised to again enjoy better times.

HPQ Stock Met on Earnings, Beat on Revenue

In Q2, earnings per share (EPS) for HP met consensus estimates of 48 cents. The company earned 40 cents per share in the same quarter last year. However, revenues of $14 billion beat estimates by $430 million. They also grew 13.1% from year-ago levels. This sent the stock up substantially in yesterday morning’s trading.

Moreover, the company raised its estimates for fiscal 2018. It now believes it will earn between $1.97 and $2.02 per share on a non-GAAP basis. This would place its forward price-to-earnings (PE) ratio at just under 11. Interestingly, the average PE over the last five years stands at 10.67. This would indicate the stock has achieved a fair valuation.

HPQ Stock Priced Like a Low-Growth Commodity Stock

The question with this stock remains whether it deserves a PE much higher than the low 10s. Gone are the days of the late-90s tech bubble where any involvement in tech would have meant a high PE ratio.

Since the split with what is now Hewlett Packard Enterprise Co (NYSE:HPE), all that remains of HPQ is a PC and a printing business. This left HP with the commoditized, low-growth product lines. In many respects, HPQ stock has started to behave like a Dow 30 stock. Right now, it looks a lot like former Dow 30 component Alcoa Corporation (NYSE:AA).

HPQ Stock Is NOT the Next Alcoa

However, the future of HPQ stock may have more in store than low-growth, unexciting products.

First, the PC industry recently experienced a revival.

Consumers have come to understand that PCs (personal computers) remain the “real productivity devices.” Smartphones and tablets work fine for recreational or on-the-go internet access. However, people can still perform many work functions more easily on PCs. In fact, in 4Q 2017, HPQ saw greater PC growth than peers such as Lenovo Group Limited (ADR) (OTCMKTS:LNVGY), Dell, or Apple Inc (NASDAQ:AAPL).

Secondly, the company appears poised for a much larger revival in printing.

3D printing has become a gamechanger because it will likely bring fundamental change to the $12 trillion global manufacturing industry. HP’s Jet Fusion 4210 3D printer continues to see increasing orders. It recently struck a deal with Proto Labs Inc (NYSE:PRLB), a manufacturer of prototypes and on-demand components, to upgrade its line of 3D printers.

The company also plans to unveil a line of 3D Metal Printers. Analysts predict metal printing will become a $2.86 billion market by 2025. Such printers will likely become a boon to the aerospace and defense industries. More importantly for HPQ investors, it could bring a second renaissance to the company, and bring HP Inc back to the cutting edge of the technology industry.

The Bottom Line on HPQ Stock

Revivals in PC sales and the rise of 3D printing could make HPQ stock a more valuable equity in the years to come. With the company meeting estimates and enjoying better than expected revenue, HP rose in morning trading.

Still, what makes HPQ stock a buy is the future of the company. A split with HPE left HPQ with only a low-growth PC and printing business. Without the growth, a PE of around 11 stands as a fair valuation.

However, with a recovery in PCs and a much larger rise in printer sales coming with 3D printing, investors should reconsider its valuation. Given the likely changes HP Inc will bring to a $12 trillion manufacturing industry, HPQ stock deserves a much higher PE ratio.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

Article printed from InvestorPlace Media,

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