Why Did HP’s Stock Price Grow 60% Between 2016 And 2018?

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HP Inc.’s (NYSE:HPQ) stock price grew over 60% from around $14 levels in October 2016 to around $23 in October 2018, primarily driven by higher sales in the notebook market. The sales growth during this period was also aided by an increase in average selling prices. We can break down the movement in the stock price into four factors: growth in revenue, change in share count, expansion of P/E multiple, and change in net income margin. You can look at our interactive dashboard analysis ~ What Factors Drove Over 60% Growth In HP Inc.’s Stock Between 2016 And 2018? ~ for more details. HP, which makes money from selling personal computing devices, printing products and related technology solutions, saw its stock price jump by over 10% since beginning of this month, followed by Xerox’s offer to buy HP Inc. for $22 a share in a cash and stock deal. However, in this note we focus on the factors that impacted HP Inc.’s share price growth between 2016 and 2018.

#1. Revenues Grew 21% From $48.2 Billion In Fiscal 2016 to $58.5 Billion In Fiscal 2018. The Biggest Change In Revenue Was Driven By The Company’s Personal Computer Segment, Which Saw Higher Notebook Sales. 
  • Personal Systems segment revenue grew from $30.1 billion in fiscal 2016 to 37.7 billion in fiscal 2018. This growth was primarily driven by higher notebooks and desktops sales. The company saw growth in both units shipped as well as average selling prices (ASPs), which bolstered the segment sales.
  • Printing segment revenue grew from $18.2 billion in fiscal 2016 to $20.8 billion in fiscal 2018, partly led by the impact of Samsungs’s printer division acquisition. In printing as well, the company saw higher ASPs in 2018.
  • Look at our interactive dashboard analysis ~ HPQ Revenues: How Does HP Inc. Make Money? ~ fore more details on HP Inc’s revenues.

#2. Adjusted Net Income Grew At A Slower Pace Compared To HP’s Revenues, Due To Slight Contraction In Margins.

  • HP’s adjusted net income grew from $2.8 billion in fiscal 2016 to $3.3 billion in fiscal 2018.
  • This can be attributed to higher revenues, partly offset by a slight decline in adjusted net income margin.
  • Adjusted net income margin declined from 5.8% in fiscal 2016 to 5.7% in fiscal 2018. We discuss the factors that impacted the margin in the section below.

#2.1 Total Expenses Increased From $45.5 Billion In Fiscal 2016 To $55.2 Billion In Fiscal 2019. However, Total Costs As A Percentage of Revenue Have Remained Stable Around the 94% Mark. Notable Change Can Be Seen Primarily In The Income Taxes, Which Were Impacted By The TCJA (Tax Cuts & Jobs Act), And Its Related Adjustments In Non-GAAP Items.

#2.2 EPS Has Also Seen Steady Growth, Led By Higher Revenue And Lower Share Count.
  • HP’s adjusted EPS grew from $1.60 in fiscal 2016 to $2.02 in fiscal 2018, driven by higher adjusted net income and lower share count.
  • No. of shares declined from 1.7 billion in fiscal 2016 to 1.6 billion in fiscal 2018, amid the company’s authorized share buyback plan of $3.0 billion from October 2016, and $4.0 billion from June 2018.

#3. Price To Earnings Multiple for HP Expanded Between 2016-2018, And It Has Been Higher Than That of Its Peer Xerox.

  • HP’s P/E multiple expanded from 8.8x in 2016 to 11.4x in 2018.
  • This compares with Xerox, which saw its P/E expand from 7.9x to 8.2x during the same period.
  • Note these multiples are arrived by using the stock prices at the end of the year (fiscal), and corresponding adjusted earnings reported for that year (fiscal).
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