HPQ Stock Price Prediction: Why We Should Buy More Shares of HP Inc.

motek 1This HPQ stock price prediction article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary:

  • Activist investor Carl Icahn bought a $1.19 billion stake in HP Inc. He also owns 10.6% stake in Xerox. Icahn is now orchestrating a Xerox takeover attempt of HPQ.
  • It might be profitable to buy HPQ on a bet that Xerox will increase its $22 cash + stock initial bid for each HPQ share.
  • Majority of HPQ stakeholders might agree to a deal if Xerox will increase its bid to $26.
  • The other scenario is HP, Inc. will instead offer an all-stock bid to acquire Xerox. HP Inc. has tried before before to buy Xerox.
  • Whatever happens, HP Inc. does not really need Xerox. It already owns the laser printer/copier business of Samsung.

The hot news last week is that activist investor Carl Icahn is orchestrating a Xerox (XRX) takeover attempt of HP Inc. (HPQ). Icahn owns 10.6% of Xerox and recently bought a 4.24% stake (worth $1.19 billion) in HP Inc. Xerox made an initial offer of $22 on mostly cash ($17 cash + 0.137 XRX share) bid for each HPQ share. HP’s management already confirmed its holding talks with Xerox about a possible deal.

This long-rumored event of an Icahn-led Xerox + HP Inc. merger/buyout deal is likely why HPQ has a one-month price return of 20%.

HPQ Stock Price Prediction
(Source: Seeking Alpha)

It is obvious that large investors and hedge fund managers acquired a lot of HPQ shares during the past 30 days. The synergy between this printing-centric companies is apparent. A Xerox-HP Inc. combo can truly dominate the $980 billion printing industry.

If successful in its bid, Xerox will own the no. 1 hardcopy peripherals/printing company, HP Inc. As of Q2 2017, HP Inc. currently touts a 42.6% market share in global A2-A4 printer shipments.

HPQ Stock Price Prediction

Xerox will also own the world’s no. 2 PC company. HP Inc. is benefiting from growing global PC shipment this year. Stronger PC sales offsets declining A2-A4 printer shipments. Please study the chart below. HP Inc. posted the higher year-over-year quarterly growth in PC shipments.

HPQ Stock Price Prediction

HPQ’s global leadership positions in printing and PC sales is why I believe Xerox will have to raise its $22 initial bid.

$22 Is Too Cheap, A Higher Bid Is Likely Possible

We should buy more HPQ on a bet that Icahn/Xerox will raise its bid up to $26 ($21 cash + 0.137 XRX share).  HPQ currently trades at $20 price level.  This market valuation is only at 8.81x Forward P/E (GAAP). I opine that HPQ deserves at least 10x Forward P/E (GAAP) fair value.

(Source: Seeking Alpha)

I know Xerox has a poor balance sheet. Xerox can still ask for a larger financing deal from Citigroup Inc. (C). This way it can offer a bid higher than $22. The strong revenue from printing supplies and PC sales of HP Inc. are sturdy enough to carry a bigger financing loan from Citigroup.

The PC business of HP Inc. generates quarterly revenue of $9.7 billion.  The Printing segment’s quarterly sales is $4.9 billion. A quarterly revenue of $14.6 billion from HP Inc. should be enough to carry the load of a possible $30 billion loan from Citigroup.  

HP Buys Xerox

If Icahn/Xerox fails to make an acceptable bid price, I still expect HP management to consider making an all-stock takeover bid for Xerox. This scenario will result in HP’s current management ending up as the ultimate decision makers. I suspect that Icahn is desperate to unload his XRX stake and is actually hoping HP Inc to buy or merge with Xerox. Going forward, the estimated $2 billion annual savings from a Xerox + HP Inc. tandem should result in better profitability. HP Inc. and Xerox currently operates at less than 7.5% net income margin. A merger between them can reduce workforce/product redundancies. HP taking over Xerox can lead to it eventually delivering an 8 to 10% net operating margin.

(Source: Seeking Alpha)

Conclusion

HP Inc. remains a strong buy even without a merger or takeover bid from Xerox. The bottom line is HP Inc. is big enough in printing and PC sales that it can flourish as a standalone company. Further, HP already owns the Laserjet printer/copier business of Samsung. It already acquired enough IP/patents on A4/A3 printer/copiers so it doesn’t really need Xerox.

Instead of wasting time negotiating with Xerox, it will be more productive for HP Inc. to focus more on increasing adoption of its additive manufacturing or 3D printers. The traditional 2D printing business might stagnate or decline going forward. However, 3D printing or additive manufacturing is growing at 18% CAGR. The global 3D printing industry only had a market size of $9.3 billion in 2018. However, this is expected to grow to $41.6 billion by 2027.

My reiterated buy recommendation for HPQ is also thanks to its bullish one-year forecast from I Know First. The stock picking AI of I Know First gave HPQ a one-year market trend score of 159.68. I Know First also touts a high probability score of 0.79 when it comes to correctly predicting the one-year market movement of HP Inc.’s stock.

HPQ Stock Price Prediction

Past Success With HPQ Stock Price Prediction

I Know First has been bullish on HPQ’s shares in past forecasts. On July 25, 2017, the I Know First algorithm issued a bullish forecast for HP Inc. stock price. The algorithm successfully forecasted the movement of the HPQ stock price for the 1 year time horizon. HPQ’s shares rose by 21.05% in line with the I Know First algorithm’s forecast. See chart below.

HPQ Stock Price Prediction
HPQ Stock Price Prediction

This bullish HPQ stock price prediction was sent to the current I Know First subscribers on July 25, 2017.

Here at I Know First, our algorithm has modeled and predicted assets price movement worldwide for short-term and long-term time horizons, ranging from 3 days to a year. Since 2011, we have been providing daily forecasts, currency forecastgold forecast, world indices, as S&P 500 forecast, and, in particular, Apple stock predictions. Today, we are producing daily forecasts for over 10,500 assets. This stock market forecast generated by our algorithmic trading tool is used by institutional clients, as well as private investors and traders to identify the best investment opportunities in the market.

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