Famous investor Warren Buffett has just poured several billion dollars into a new holding. The company is a well-known US tech name, with a long history. Ought I to follow the Sage of Omaha and add it to my portfolio?
Buffett invests in US tech company
Buffett’s company Berkshire Hathaway announced yesterday that it has built a stake of around 11% in HP (NYSE: HPQ) for roughly $4.2bn. HP, better known to many of us under its old name Hewlett-Packard, is the personal computer and printer business that was left over when the company’s B2B operation was spun off as Hewlett Packard Enterprise in 2015.
The company looks cheap at the moment, trading on a price-to-earnings ratio of just eight. It is dividend-paying, with a yield of 2.9%. Revenues and earnings both grew last year. Around two thirds of sales came from personal systems, such as laptops. That area saw 18% annual revenue growth. The rest of HP’s sales come from its printing division, which grew around 14% last year.
The attractions of HP
It has a fairly strong brand, something Warren Buffett sees as giving a company pricing power. Its business generates substantial free cash flow, which is also something Buffett likes a lot. Such free cash flows enable dividends.
I reckon in its printing division at least, HP benefits from the “razor-razorblade model” taught in business schools. Just as with a Gillette razor, when consumers buys an HP printer, they are likely to buy HP ink cartridges to refill it. So even if profit margins on the initial product sale are low, there is lots of money to be made on selling peripherals such as ink. As a buyer of such cartridges, this price gouging infuriates me – but it has a clear business logic.
The current valuation also makes HP look fairly cheap. Buffett likes to buy great companies at good prices. HP is trading less than 15% below its all-time high price, but from a valuation perspective I do not think it looks expensive.
Should I follow Warren Buffett?
Buffett has been wrong in this space before, however. He bought IBM when it too had an attractive business outlook and dividend yield. The company went into a prolonged period of falling revenues. Buffett eventually sold his whole stake, apparently at a loss.
He has been far more successful with Apple. But to me, HP looks more like IBM than Apple. Prospects for long-term demand growth look doubtful. I see printing as something that is likely to decline, not grow, and laptops might end up going the same way because many people now just use their phones. While Apple has brand fanatics, I do not think the HP brand is as powerful. It still gives the company some pricing power. But I do not think the HP brand gives the company the sort of pricing power Apple has.
Given its current valuation, the HP share price could well increase in the coming years. But from a long-term investing perspective, I do not see it as the sort of great business in which Warren Buffett usually likes to invest. I will not be following him and buying HP for my portfolio.
