HP Hewlett-Packard | Fundamental Analysis | MUST READ ! ! LONG

Shares of HP climbed 10% to a new all-time high following the company`s Q4 financial results last week.

The company's revenue increased 9% from a year earlier to $16.7 billion, surpassing forecasts by $1.3 billion. Adjusted earnings rose 52% to $0.94 per share, six cents exceeding expectations.

HP did not provide exact earnings estimates for fiscal 2022 but foresees adjusted EPS to grow 8%-14% in the first quarter and 7%-13% for the full year. The averages of both estimates topped Wall Street's expectations.

HP's results seem to be strong, but is there any room for the stock to rise after surging more than 50 percent over the past year? Let's look at a few arguments to buy HP, and one reason to sell it, to figure it out.

First, personal computer sales are still strong.

HP's personal systems division, which sells laptops, desktops, and workstations, accounted for 71% of revenue during the quarter. This business encountered a solid increase through the pandemic since more people upgraded their computers to work and attend classes online.

Nevertheless, the bears say the segment's growth will stall this year as the accompanying pandemic "tailwinds" have weakened and the PC market has encountered chip deficits and supply chain disruptions.

The consumer-oriented segment unquestionably encountered a slowdown within the preceding two quarters, but the bears seem to have underestimated the resilience of the commercial business, which has been recovering as more businesses resume operations and upgrade their legacy systems.

During a conference call, CEO Enrique Lores said HP "saw the highest demand and highest profitability" of its Windows-based commercial products during the quarter, and its supply remained "notably eminent" as it worked to eliminate component shortages. In other words, HP is still selling its commercial systems as fast as it can produce them.

Second, the company's operating margins are stable.

Another bearish argument against HP is that shrinking margins in the printing segment will reduce the company's profits. However, HP's overall operating margin is up 120 basis points from a year ago, with significant improvement in both the PC and print segments.

In both segments, HP attributed the improved margins to favorable pricing and an improved mix of higher-margin products, which largely offset higher raw material costs and new investments.

It's not a perfect balance, but solid operating margins and large buybacks (including $1.75 billion in the fourth quarter) should allow HP to continue growing earnings per share at a healthy pace.

Finally, low valuations and high dividends should be kept in mind.

HP stock has more than doubled since Xerox abandoned its aggressive offer last March. Today, that value is about $40 billion -- up from the $35 billion Xerox was offering.

Nevertheless, HP stock still trades at eight times earnings guidance. It also pays a generous dividend yield of 3.1%, which is backed by a low payout ratio of about 24%. This low valuation and high dividend yield could make the company a good defensive play in a volatile market.

However, there is one reason to sell HP: its printing business.

HP's printing segment underwent momentum during the pandemic as more people bought printers for home projects, offsetting the slowdown in commercial sales due to business closures.

Last year, though, the increase in the consumer segment slowed as the tailwind weakened, and the commercial segment stabilized only slightly after a steep decline in 2020.

As a result, modest print segment growth of 1% year-over-year in the fourth quarter indicates that business continues to decline. Long-term unfavorable factors - including long renewal cycles, growth in paperless jobs, and competition from ink and toner manufacturers - could slow the growth of this weak segment for the foreseeable future.

HP's printing business will remain the company's weakest link, but its potential may steadily develop as it expands its industrial 3D printing division and its subscription-based Instant Ink service.

HP's personal systems business should remain strong, and its extension could even expedite when component shortages end. Meanwhile, large stock buybacks, high dividends, and low valuations should limit the company's downside potential and attract value-oriented investors.

Simply put, HP's strengths still easily outweigh its weaknesses, and it's a good option if you're worried about a possible recession or market crash.