What a fantastic six months it’s been for HP. Shares of the company have skyrocketed 72.5%, setting a new 52-week high of $32.65. This was partly due to its solid quarterly results, and the run-up 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? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think HP Will Underperform?
We’re glad investors have benefited from the price increase, but we don’t have much confidence in HP. Here are three reasons why there are better opportunities than HPQ, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, HP struggled to consistently increase demand as its $59.16 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect HP’s revenue to stall, a deceleration versus its flat result for the past five years. This projection doesn’t excite us and indicates its products and services will face some demand challenges.
3. EPS Growth Has Stalled
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
HP’s EPS was flat over the last five years, just like its revenue. This performance was underwhelming across the board.
Final Judgment
HP doesn’t pass our quality test. Following the recent rally, the stock trades at 10.9× forward P/E (or $32.65 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of HP
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