BoldWarren Buffett’s Berkshire Hathaway has cut its position in HP Inc. nearly in half over the past two months, offloading about $1.3 billion worth of shares as growth stalls for the PC and printer maker. The legendary investor, known as the “Oracle of Omaha,” initially bought into HP in early 2022, betting work-from-home trends would boost demand. But with sales and earnings falling in 2023 amid a weakening PC market, Buffett appears to be cutting his losses and moving on.
The sale leaves Berkshire with 51.5 million HP shares, still a substantial stake. However, Buffett may continue trimming the position if conditions don’t improve. HP management’s mediocre growth projections for 2024, including just 5% EPS expansion, provide little confidence in an imminent turnaround.
Moreover, the long-term outlook for both printing and PCs faces enduring headwinds. As businesses embrace digitization, demand for printers should gradually decline. And while a slight rebound is expected in PCs next year after a disastrous 2023, competition from Apple will constrain Windows vendors. With lackluster prospects, it’s understandable why the veteran investor has soured on the stock.
So where is Buffett likely redirecting the $1.3 billion in proceeds from the HP share sales? The most probable destinations are U.S. Treasuries and Berkshire Hathaway stock repurchases.
As of September 30th, Berkshire held a staggering $126.4 billion in short-term Treasury bills, taking advantage of relatively high yields. With fewer compelling values in the equity market presently, Buffett seems content to park cash in low-risk government bonds. That allocation has likely grown after selling the HP shares.
Berkshire has also aggressively repurchased its own stock since 2018, when Buffett loosened buyback criteria. At current valuations, he apparently still views Berkshire shares as underpriced, buying back $665 million worth last quarter. Having an extra $1.3 billion on hand could mean ramping up repurchases in the fourth quarter and beyond.
The HP sale was disclosed in recent SEC filings, which revealed Berkshire unloaded 46.4 million shares between October 3rd and November 30th. Based on HP’s average share price in November, the stake liquidation likely brought in around $1.3 billion. This followed earlier sales of 23 million shares in late September and early October, generating another $619 million in cash for Buffett and his portfolio managers.
Berkshire began building a position in HP in the first quarter of 2022, when surging pandemic demand for PCs and home printers boosted prospects for the tech stalwart. With HP shares relatively inexpensive compared to earnings and cash flow, the company seemed poised to benefit from remote work and education trends.
Initially after COVID struck, HP witnessed strong revenue gains in both its Personal Systems and Printing segments as consumers and businesses rushed to upgrade technology for at-home usage. This drove earnings per share up 33% in 2021. Buffett, who has a penchant for reliable cash generators trading at value prices, viewed HP as an archetypal investment.
However, conditions rapidly deteriorated over the past year as inflation and macro uncertainty caused consumers and enterprises to tighten budgets. HP’s net revenue declined 14.6% through the first nine months of 2023, with particular softness in commodity home printing. Despite aggressive cost cuts, EPS over the same period fell nearly 18% on a non-GAAP basis.
Making matters worse for shareholders, management guided for only 5% EPS growth at the midpoint in 2024 along with minimal share buybacks. While positive, this outlook still leaves earnings well below 2021’s peak, hardly evincing an imminent comeback. With financial performance worsening, Buffett appears to have lost conviction in the company’s near to medium-term rebound prospects.
HP faces persistent long-term challenges in both printing and PCs. As global digitization accelerates, fewer documents get printed, reducing toner and ink cartridge demand. HP’s printing revenue already slid 21% last quarter, led by weakness in consumer models. Though higher margin commercial printing may decline more gradually, printing overall constitutes a fading industry.
Likewise, the PC segment which accounts for nearly 75% of HP’s total sales, confronts maturation after a pandemic-fueled sales surge. Consumers and enterprises have largely updated existing computers, leaving limited room for growth in the years ahead. According to market research firm IDC, global PC shipments should rise just 3.7% next year and 3.1% annually on average through 2027 – hardly robust expansion for a company HP’s size.
Adding to the headwinds, Apple continues gaining global PC share at the expense of Windows OEMs like HP, Dell, and Lenovo. With a loyal installed base and premium brand equity, Apple seems poised to capture an outsized portion of the market’s modest remaining growth. HP and peers may have to compete aggressively on price to sustain market share, compressing margins over time.
In sum, Buffett appears to have made a judicious decision exiting half his HP stake near breakeven. The company faces an unfavorable risk-reward outlook presently, providing sufficient rationale behind Berkshire’s sale. While HP maintains substantial intrinsic strengths including efficient operations, robust cash generation, and shareholder payouts, the broader environment for PCs and printing seems destined for protracted softness.
Rather than await an uncertain turnaround, the billionaire investor apparently prefers redeploying funds into safer Treasuries and Berkshire buybacks for now. As the Oracle of Omaha famously quipped, “Our favorite holding period is forever” – but in HP’s case, forever may have just gotten shorter. If progress remains lackluster over the coming year, investors shouldn’t be surprised to see Berkshire part with the remainder of its shares as well.
