Hewlett-Packard Split Great News for HPQ Stock, But It’s Not a Buy

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Hewlett-Packard (HPQ) finally acceded to Wall Street’s long-standing wishes Monday by agreeing to split into two separate companies, sending shares of HPQ stock up sharply in early trades.

hpq hp hp stockAs we said when eBay (EBAY) announced the spin off of PayPal last week, it’s about time. Splitting the PC and printer business from the corporate hardware and services division was such an obvious move, it’s a wonder it took this long for HPQ to do it.

The business of selling PCs and printers has been one of shrinking demand, falling prices and lower margins for almost a decade now. It’s about as sluggish a legacy business as a consumer tech company can have.

Even before the rise of smartphones and tablets, the idea of a business predicated on slapping a plastic box around a bunch of off-the-shelf, commoditized components was on its way down. That’s why International Business Machines (IBM) famously sold its PC business to Lenovo (LNVGY) a decade ago. It’s also what prompted former No. 1 PC-maker Dell to go private and Sony (SNE) to exit its PC business.

This is very welcome news for anyone holding HPQ stock — a long-term laggard that needs both short-term and strategic catalysts. True, HPQ stock is up 32% for the year-to-date, which is clobbering the broader market, but pull back and you’ll see that shares are only a levels last seen in 2011.

That’s right: HPQ stock has been dead money for two years.

Another Shot for HPQ Stock

The split should give HPQ stock a second chance. The hardware and services businesses is growing and offers an opportunity for margin expansion. Meanwhile, the slow-growth, low-margin PC and printer business can be a boring but steady cash machine.

Managing both companies to their strengths can help them succeed where being tied together hurts them both. As InvestorPlace writer James Brumley writes:

“Dissimilar business units can — and often do — lead to internal company conflict as each unit battles for the most of the company’s attention and resources. That battle can be so distracting that none of the organization can truly thrive.”

But that doesn’t make HPQ stock a buy. At least not now. The only reason to buy HPQ before the split is to get shares in both companies — and it’s not clear why anyone would want that.

There’s really nothing appealing about PCs and printers. That part of HPQ after the split might be good for a dividend, but not much else. Look at Lexmark (LXK), the printer business split off by IBM back in the day. Profit margins are about 5%. It gets a forward price-to-earnings ratio of 10. And the stock has been a dog for a decade.

Yes, it generates plenty of cash to keep the payouts coming, but then how hard is it to find a dependable dividend-payer with a 3.5% yield that also has the potential for price-appreciation?

As for the corporate hardware and services business, that’s the part of HPQ that has some promise. It might be worth owning — even if just as a takeover target — but not at the cost of taking the PC and printer business too. Indeed, PC and printers are such an albatross, reports say HPQ couldn’t even get Dell or Lenovo to take it off its hands.

Anyone holding HPQ stock should hold on through the split. One of these business looks worth owning.

But if you don’t own HPQ, don’t buy now. You’ll get a better deal after the split because you won’t have to take PC and printers too.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/hewlett-packard-hpq-stock-buy/.

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